Complete issue
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Complete issue
Monetary Policy Report 2 08 June Reports from the Norges CentralBanks Bank rapportserie of Norway No. nr. 3-2008 3/2008 Monetary Policy Report 2/2008 Norges Bank Oslo 2008 Address: Bankplassen 2 Postal Address: Postboks 1179 Sentrum, 0107 Oslo Phone: +47 22 31 60 00 Fax: +47 22 41 31 05 E-mail: [email protected] Website: http://www.norges-bank.no Governor: Svein Gjedrem Deputy Governor: Jan F. Qvigstad Editor: Svein Gjedrem Design: Burston-Marsteller Printing: Tellus Works Reclamo AS The text is set in 10½ point Times New Roman / 9 point Univers ISSN 1504-8470 (print) ISSN 1504-8497 (online) Monetary Policy Report The Report is published three times a year, in March, June and October/November. The Report assesses the interest rate outlook and includes projections for developments in the Norwegian economy, analyses of selected themes and a summary of Norges Bank’s regional network reports. At its meeting on 23 April, the Executive Board discussed relevant themes for the Report. At the Executive Board meeting on 11 June, the economic outlook was discussed. On the basis of this discussion and a recommendation from Norges Bank’s management, the Executive Board adopted a monetary policy strategy for the period to the publication of the next Report on 29 October 2008 at the meeting held on 25 June. The Executive Board’s summary of the economic outlook and the monetary policy strategy are presented in Section 1. In the period to the next Report, the Executive Board’s monetary policy meetings will be held on 13 August, 24 September and 29 October. 4 Table of Contents Editorial 7 1. Monetary policy assessments and strategy 8 Summary and monetary policy strategy 22 Boxes Changes in the interest rate path Monetary policy since the previous Report 18 23 2. The global economy, financial markets and commodity markets 24 3. Economic developments 35 Box Recent price developments Boxes 38 53 Underlying inflation 54 SAM - System of models for short-term forecasting 56 Projections in Monetary Policy Report 1/08 and 2/08 60 Annex l Regional network 65 Annex ll Tables, charts and detailed projections 74 The Monetary Policy Report is based on information in the period to 20 June 2008. The monetary policy strategy in Section 1 was approved by the Executive Board on 25 June 2008. NORGES BANK MONETARY POLICY REPORT 2/2008 5 Monetary policy in Norway Objective The operational target of monetary policy is low and stable inflation, with annual consumer price inflation of approximately 2.5% over time. Implementation Norges Bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment. In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances are not taken into account. Monetary policy influences the economy with a lag. Norges Bank sets the interest rate with a view to stabilising inflation close to the target in the medium term. The horizon will depend on disturbances to which the economy is exposed and the effects on prospects for the path for inflation and the real economy. The decision-making process The main features of the analysis in the Monetary Policy Report are presented to the Executive Board for discussion at a meeting about two weeks before the Report is published. Themes of relevance to the Report have been discussed at a previous meeting. On the basis of the analysis and discussion, the Executive Board assesses the consequences for future interest rate developments, including alternative strategies. The decision to adopt a monetary policy strategy is made on the same day as the Report is published. The strategy applies for the period up to the next Report and is presented at the end of Section 1 in the Report. The key policy rate is set by Norges Bank’s Executive Board. Decisions concerning the interest rate are normally taken at the Executive Board’s monetary policy meeting every sixth week. The analyses and the monetary policy strategy, together with assessments of price and cost developments and conditions in the money and foreign exchange markets, form a basis for interest rate decisions. Communication of the interest rate decision The monetary policy decision is announced at 2pm on the day of the meeting. At the same time, the Executive Board’s monetary policy statement is published. The statement provides an account of the main aspects of economic developments that have had a bearing on the interest rate decision and the Executive Board’s assessments. The Bank holds a press conference at 2:45 pm on the same day. The press release, the Executive Board’s monetary policy statement and the press conference are available on www.norges-bank.no. Reporting Norges Bank reports on the conduct of monetary policy in the Monetary Policy Report and the Annual Report. The Bank’s reporting obligation is set out in Section 75c of the Constitution, which stipulates that the Storting shall supervise Norway’s monetary system, and in Section 3 of the Norges Bank Act. The Annual Report is submitted to the Ministry of Finance and communicated to the King in Council and to the Storting in the Government’s Kredittmeldingen (Credit Report). The Governor of Norges Bank provides an assessment of monetary policy in an open hearing before the Standing Committee on Finance and Economic Affairs in connection with the Storting deliberations on the Credit Report. 6 Editorial A recognisable monetary policy The upturn in Norway is entering a new phase. A period of low inflation and high growth is now being followed by somewhat higher inflation and lower growth. It is important that the inflationary tendencies now in evidence do not become entrenched. In recent months, soaring energy and food prices have put added upward pressure on CPI inflation. An inflation problem will first arise if the increase in energy and food prices feeds through to expectations of higher wage growth and a generalised rise in prices. The experience of the 1970s and 1980s shows that it may be costly if monetary policy does not react to an unexpected increase in inflation. Monetary policy is most effective when it is predictable and recognisable. The interest rate was set at a low level when inflation was low and the interest rate has been raised gradually in this cyclical upturn, well ahead of the rise in inflation. We expect that this tightening will bring down capacity utilisation to a more normal level so that inflation will not become too high. Inflation is now close to, but somewhat higher than 2.5%. As long as the inflation outlook is close to the target – somewhat lower or somewhat higher – the interest rate will remain at the current level, or perhaps somewhat higher, in the coming year. However, should inflation accelerate rapidly, the key policy rate will have to be raised further to counteract expectations of higher inflation. Jan F. Qvigstad 25 June 2008 NORGES BANK MONETARY POLICY REPORT 2/2008 7 1 Monetary policy assessments and strategy Chart 1.1 Consumer prices. 12-month change. Per cent. January 2004 – May 2008 5 5 2.5 2.5 0 0 CPI Weighted median 20 per cent trimmed mean CPI-ATE 1) The economic situation Inflation has been slightly higher than projected. Measured by the consumer price index (CPI), inflation is now higher than 3%. A strong rise in prices for electricity and petrol has pushed up CPI inflation since autumn 2007. The past year has also seen a marked rise in various indicators of underlying inflation. While these indicators were below 1½% a year ago, they are now between 2¼ and 3¼% (see Chart 1.1). The rise in prices for many domestically produced goods and services is picking up, and the fall in prices for imported consumer goods has decelerated (see Chart 1.2). On the whole, underlying inflation is close to, but somewhat higher than 2.5%. Inflation has increased in many countries. Oil and gas prices have risen further through spring (see Chart 1.3). Oil prices have been higher this spring than ever recorded. Food prices are now somewhat higher than in March. China and other low-cost countries account for an increasing share of global goods production, resulting in a slow rise or a decline in prices for imported goods in the West. However, living standards have been gradually rising in low-cost countries, and demand for goods and services has increased, resulting in a considerable rise in global prices for food and energy. -2.5 2004 1) 2006 2007 CPI adjusted for tax changes and excluding energy products. Chart 1.2 CPI-ATE.1) Total and by supplier sector2). 12-month change. Per cent. January 2004 – May 2008 5 5 2.5 2.5 0 0 -2.5 Domestically produced goods and services -2.5 Imported consumer goods CPI-ATE -5 2004 1) 2) -5 2005 2006 2007 2008 CPI adjusted for tax changes and excluding energy products. Norges Bank’s estimates. Sources: Statistics Norway and Norges Bank Chart 1.3 Average prices for crude oil and natural gas. 2000 Q1 – 2008 Q21) 140 500 Gas price UK, USD per 1000 Sm3, left-hand scale 120 Oil price, Brent Blend USD per barrel, right-hand scale 100 300 80 200 60 40 100 20 0 2000 0 2002 2004 2006 1) For 2008 Q2 the average of daily figures 1 April 2008 to 20 June 2008 is used. Sources: Thomson Reuters and Norges Bank 8 2008 Source: Statistics Norway 400 Capacity utilisation in Norway is high. An ample supply of labour, strong productivity growth and considerable terms of trade gains through several years have boosted the growth potential of the Norwegian economy. Many years of strong economic growth have nevertheless gradually led to labour and input shortages. Unemployment has reached a historically low level (see Chart 1.4). Wages are rising sharply, while there are signs that productivity growth is slowing. -2.5 2005 2008 Chart 1.4 Registered unemployed as a percentage of the labour force. Seasonally adjusted. January 1980 – May 2008 6 6 4 4 2 2 0 0 1980 1984 1988 1992 1996 2000 2004 2008 Source: Norwegian Labour and Welfare Administration (NAV) Chart 1.5 Difference between 3-month money market rate and key policy rate expectations in the market1). Percentage points. Historical (from 1 June 2007) and ahead (at 20 June 2008) 1.4 1.4 1.2 1.2 1 1 0.8 0.8 0.6 0.6 0.4 0.4 0.2 US Euro area UK Norway 0.2 0 0 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 1) The expected key rate is derived from Overnight Indexed Swap (OIS) interest rates. For Norway, the estimates are based on key policy rate expectations in the market. Sources: Bloomberg, Thomson Reuters and Norges Bank Chart 1.6 Key policy rate, money market rate1) and banks’ lending rate on new loans2). Per cent. 3 May 2007 – 20 June 2008 9 9 8 8 7 7 6 6 5 5 4 4 3 3 Money market rate 2 Key policy rate Mortgage rate 1 0 May-07 2 1 0 Aug-07 Nov-07 Feb-08 May-08 1) 3-month NIBOR (effective). Interest rate on new mortgage loans for NOK 1m within 60% of purchase price with floating interest rate. Figures for the 20 largest banks, weighted according to market share. 2) The upturn in Norway is entering a new phase. A period of low inflation and high growth is now being followed by somewhat higher inflation and lower growth. Growth in the Norwegian economy seems to have slowed as expected in 2008 Q1. Enterprises in Norges Bank’s regional network report high capacity utilisation but moderating growth in most of the industries. They are expecting growth to slow further in the coming six months. The number of building starts has declined. Household goods consumption has not increased since last autumn. On the other hand, public expenditure is expanding rapidly, and investment growth in the business sector and in petroleum activities is strong. Households’ expectations concerning their own financial position ahead have deteriorated somewhat, but remain positive. Enterprises are still expecting continued employment growth ahead. Global economic growth is slowing. In the US, housing investment and house prices are decreasing and employment is falling. Consumers are generally pessimistic with regard to economic developments. Manufacturing output growth is at zero. House prices are now also falling in several European countries, and confidence indicators are showing a considerable decline. Banks and financial institutions in the US and Europe are tightening credit standards. In 2008 Q1, growth was nevertheless stronger than expected, not only in the US, but also in Europe and Japan. Growth in emerging market economies is still high. Higher inflation, the decline in house prices and residential construction in a number of countries and tighter bank credit standards are dampening global growth prospects for the coming year. Financial market conditions have improved somewhat since March. Equity prices have risen. The price of credit default insurance has fluctuated to some extent, but has moderated. Risk premiums in the bond market have also fallen from their high levels in March. Many central banks have extended their liquidity facilities to improve money market conditions. Nevertheless the premiums on unsecured interbank loans are still very high (see Chart 1.5). Sources: Norsk familieøkonomi AS and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 9 Premiums are expected to remain high, but to decrease somewhat ahead. Since summer 2007, money market rates in Norway have risen by close to ¾ percentage point more than the key rate (see Chart 1.6). In the same period, bank lending rates on highly secured mortgages have risen in pace with money market rates. Average bank lending rates have risen somewhat more, but lending margins are still low from a historical perspective. On the other hand, deposit rates have been considerably lower than money market rates, but intensified competition for deposits is now pushing up deposit rates. Chart 1.7 Policy rates and estimated forward rates on 10 March and 20 June.1) Per cent. 1 June 2007 – 31 December 2011 9 9 8 8 7 7 6 6 5 5 4 4 3 3 US 2 Euro area 2 1 UK 1 0 Jun-07 0 Jun-08 Jun-09 Jun-10 Jun-11 1) Interest rate expectations abroad have shown a marked upward shift. It seems that an increased risk of rising inflation has led to higher real interest rates. While earlier this year market participants expected lower or unchanged key rates in many countries, they now expect higher interest rates in the US, the euro area and the UK in the course of 2008 (see Chart 1.7). The import-weighted krone exchange rate has appreciated by about 4% over the past year (see Chart 1.8). The krone depreciated when the financial market turbulence intensified before Easter, and has since fluctuated somewhat. The import-weighted krone exchange rate is now a little weaker than at the time of publication of the previous Monetary Policy Report in March. Baseline scenario Monetary policy in Norway is oriented towards annual consumer price inflation of close to 2.5% over time. Low and stable inflation is the most important contribution monetary policy can make to sound economic developments. This provides businesses and households with an anchor for inflation expectations. The inflation average has been around 2% over the past ten years, which is somewhat lower than, but fairly close to the target of 2.5% (see Chart 1.9). When there is confidence in monetary policy, expected inflation will be close to the inflation target over time, which in itself contributes to stabilising inflation. Developments in the long-term forward interest rate differential between Dotted lines show forward rates at 10 March 2008. Broken lines show forward rates at 20 June 2008. Forward rates are based on Overnight Indexed Swap (OIS) interest rates. Sources: Thomson Reuters and Norges Bank Chart 1.8 Exchange rates.1) The import-weighted exchange rate index (I-44), 1995 = 100, NOK/EUR and NOK/USD. Week 1 2002 – Week 25 2008 120 9 107 8 94 7 81 6 I-44, left-hand scale NOK/EUR, right-hand scale NOK/USD, right-hand scale 68 55 2002 1) 4 2003 2004 2005 2006 2007 2008 A rising curve denotes a weaker krone exchange rate. Source: Norges Bank Chart 1.9 Inflation. Moving 10-year average1) and variation2) in CPI. Per cent. 1980 – 20083) 14 14 12 12 Variation 10 10 8 8 6 6 CPI 4 Inflation target 0 1980 4 2 2 0 1985 1990 1995 2000 1) 2005 The moving average is calculated 7 years back and 2 years ahead. The band around the CPI is the variation in the CPI adjusted for tax changes and excluding energy products in the average period, measured by +/- one standard deviation. 3) Projections for 2008 - 2010 from this Report form the basis for this estimate. 2) Sources: Statistics Norway and Norges Bank 10 5 Chart 1.10 Differential between long-term forward interest rates in Norway and the euro area.1) Percentage points. 1 January 2002 – 20 June 2008 2 2 1.5 1.5 1 1 0.5 0.5 0 2002 1) 0 2003 2004 2005 2006 2007 2008 5-year forward rates 5 years ahead. Sources: Thomson Reuters and Norges Bank Chart 1.11 Expected consumer price inflation 2 and 5 years ahead.1) Per cent. 2002 Q2 – 2008 Q2 5 5 2.5 2.5 Expected inflation 5 years ahead Expected inflation 2 years ahead 0 2002 0 2003 2004 2005 2006 2007 2008 1) Average of expectations of employer/employee organisations and experts (financial industry employees, macro analysts and academics). Source: TNS Gallup Chart 1.12 3-month real interest rate1), real key policy interest rate1), 10-year real interest rate2) and the normal real interest rate in Norway3). Per cent. 1996 Q1 – 2008 Q24) 9 9 3-month real interest rate 8 Key policy real interest rate 10-year real interest rate 7 8 7 6 6 5 Interval for normal real interest rate 4 5 4 3 3 2 2 1 1 0 1996 Norway and the euro area can provide information about inflation expectations. As the inflation target is higher in Norway, the differential should normally be in the range ½ - 1 percentage point, depending on risk premiums in bond markets. The differential has been within this range in recent years (see Chart 1.10). This may indicate that inflation expectations among financial market participants have exhibited fairly similar developments in Norway and the euro area. According to TNS Gallup’s expectations survey, long-term inflation expectations among employer and employee organisations and among experts in the financial industry and academia are firmly anchored on the inflation target (see Chart 1.11). More short-term inflation expectations, on the other hand, have risen since autumn 2007. The interest rate was set at a low level when inflation declined through 2003, which gradually led to prospects for higher inflation. Since summer 2005, the key policy rate has gradually been raised towards a more normal level. The key policy rate was increased well before inflation moved close to 2.5%. This has contributed to stabilising inflation expectations and smoothing fluctuations in output and employment. The interest rate increases that have been implemented are now having a dampening impact on economic growth. When inflation is close to 2.5%, the normal interest rate level over time is considered to be between 5% and 6%. The key rate is now in this range. As a result of higher money market premiums and financial market uncertainty, funding is becoming more expensive for companies and households. Measured by money market rates, the real interest rate is now higher than what we regard as a normal level (see Chart 1.12). In addition, the krone has appreciated in recent years. Monetary policy is having a tightening effect. This may lead to moderating capacity utilisation ahead, preventing inflation from becoming too high. 0 1998 2000 2002 2004 2006 2008 1) Deflated by the 12-quarter moving average (centred) of inflation measured by the CPI. Projections for the CPI from this Report form the basis for this estimate. 2) 10-year swap rate deflated by the inflation target. 3) Calculations may indicate that the normal real interest rate for Norway is currently in the lower end of the interval 2½ - 3½%. 4) For 2008 Q2 the average of daily figures 1 April 2008 to 20 June 2008 is used. The key policy rate is set with a view to keeping inflation close to 2.5%. The interest rate path ahead shall provide a reasonable balance between the path for inflation and the path for capacity utilisation (see box on criteria for an appropriate interest rate path on page 13). Sources: Statistics Norway and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 11 In the conduct of monetary policy, direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary shocks shall not, in general, be taken into account. The monetary policy stance is based on our view that the current level of underlying inflation is close to, but somewhat higher than 2.5%. The consumer price index adjusted for tax changes and excluding energy products, CPI-ATE, has often been used as an indicator of underlying inflation. A weakness in the CPI-ATE is that it does not only exclude temporary effects resulting from tax changes and fluctuations in energy prices, but also trend changes in these factors. If we take into account that energy prices have risen more than other prices over a fairly long period, the result is a picture of underlying inflation that over time is more consistent with developments in the CPI (see Chart 1.13 and box on page 54). The rise in prices for domestically produced goods and services is likely to pick up in the coming months. There are signs that productivity growth is weak or falling, and wage and cost inflation is high. Prices for electricity and petroleum products have surged over the past year. Oil prices are historically high. The risk of high energy prices feeding through to prices for other goods and services cannot be ruled out. High energy and food prices on world markets and rising global inflation may gradually result in a sharper rise in prices for imported goods. The appreciation of the krone in recent years will restrain the rise in prices for imported goods for a period ahead. However, an additional fall in import prices as was the case in 2003-2007 cannot be expected unless the krone appreciates further. The increase in inflation, prospects of rising inflation and the consideration of anchoring inflation expectations close to the target suggest that the key rate should be raised further. Owing to rising global inflation, expectations concerning key rates in other countries have risen markedly, in spite of weaker growth prospects. In isolation, this also points towards a higher interest rate in Norway. 12 Chart 1.13 Consumer prices. 12-month change. Per cent. January 2004 – May 2008 5 5 2.5 2.5 0 0 CPI CPI-ATE 1) CPIXE 2) -2.5 2004 -2.5 2005 2006 2007 2008 1) CPI adjusted for tax changes and excluding energy products. CPI adjusted for tax changes and excluding temporary changes in energy prices (see box on page 54). 2) Sources: Statistics Norway and Norges Bank Chart 1.14 Real exchange rate. Deviation from mean 1970 – 2007. Per cent. 1970 – 20081) 25 25 20 Relative consumer prices Relative wage costs 20 15 15 10 10 5 5 0 0 -5 -5 -10 -10 -15 -15 -20 -20 1970 1975 1980 1985 1990 1995 2000 2005 1) Data for 2008 based on observations to 20 June. Sources: Statistics Norway, Technical Reporting Committee on Income Settlements, Ministry of Finance and Norges Bank Criteria for an appropriate interest rate path The operational target of monetary policy is low and stable inflation, with annual consumer price inflation of approximately 2.5% over time. In interest rate setting, the forecast for future interest rate developments should satisfy the following main criteria: 1) The interest rate should be set with a view to stabilising inflation close to the target in the medium term. The horizon will depend on disturbances to which the economy is exposed and the effects on the prospects for the path for inflation and the real economy. 2) The interest rate path should provide a reasonable balance between the path for inflation and the path for capacity utilisation. In the assessment, potential effects of asset prices, such as property prices, equity prices and the krone exchange rate on the prospects for output, employment and inflation are also taken into account. Assuming the criteria above have been satisfied, the following additional criteria are useful: 3) Interest rate developments should result in acceptable developments in inflation and output also under alternative, albeit not unrealistic assumptions concerning the economic situation and the functioning of the economy. 4) Interest rate adjustments should normally be gradual and consistent with the Bank’s previous response pattern. 5) As a cross-check for interest rate setting, it should be possible to explain any substantial and systematic deviations from simple monetary policy rules. NORGES BANK MONETARY POLICY REPORT 2/2008 High oil and gas prices may buoy up demand growth ahead. Investment in petroleum activities is high and is expected to rise further next year. This will probably increase output among oil-sector suppliers. It is also likely that higher investment budgets in oil companies will lead to higher selling prices among subcontractors. High energy prices provide greater scope for growth in public spending and may lead to an improvement in companies’ and households’ expectations. On the other hand, there are signs that growth in the Norwegian economy is slowing broadly in line with projections. Weaker developments among our trading partners may affect activity and profitability in Norwegian export industries. Our export goods may be more difficult to sell when growth slows in other countries. Should weaker global economic developments also result in a marked fall in commodity prices, including oil and gas prices, the impact on the Norwegian economy will be more pronounced. The cost level in Norway is now at its highest level relative to trading partners since Norway became an oil nation (see Chart 1.14). Labour demand is nevertheless very high. It may be that we have yet to see the full impact of the high cost level. High prices for Norwegian export goods have limited the impact so far. After several years of high profit shares, wage shares are now on the rise in an environment of slower productivity growth and strong growth in wage income. This will probably curb growth in labour demand ahead. Weaker productivity growth may also have a dampening impact on capacity growth in the economy. The prospects for slower growth may increase uncertainty among Norwegian households and businesses, which may lead to a rapid increase in the household saving ratio and slower consumption growth. This may also lead to the postponement of new projects and investments, or reduced willingness among enterprises to recruit new labour. Tighter bank lending standards may also curb demand growth. Even though financial market conditions abroad have improved somewhat since March, there is still considerable 13 Chart 1.15a Projected key policy rate in the baseline scenario with fan chart. Per cent. 2006 Q1– 2011 Q4 Chart 1.15b Estimated output gap in the baseline scenario with fan chart. Per cent. 2006 Q1 – 2011 Q4 5 9 5 8 4 7 7 3 3 6 6 2 2 5 5 1 1 4 4 3 3 9 8 90% 70% 50% 30% 90% 70% 50% 30% 4 0 0 2 -1 -1 1 1 -2 -2 0 Mar-06 0 -3 Mar-06 2 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 -3 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Source: Norges Bank Sources: Statistics Norway and Norges Bank Chart 1.15c Projected CPI in the baseline scenario with fan chart. 4-quarter change. Per cent. 2006 Q1 – 2011 Q4 Chart 1.15d Projected CPIXE1) in the baseline scenario with fan chart. 4-quarter change. Per cent. 2006 Q1 – 2011 Q4 7 90% 70% 7 50% 30% 6 6 5 5 4 4 3 3 2 2 1 1 0 Mar-06 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sources: Statistics Norway and Norges Bank 5 5 90% 70% 50% 30% 4 4 3 3 2 2 1 1 0 Mar-06 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 1) CPI adjusted for tax changes and excluding temporary changes in energy prices. Sources: Statistics Norway and Norges Bank uncertainty as to the scale of losses at banks and financial undertakings. It has been observed earlier that the turbulence in financial markets has flared up again after periods of relative calm. If the turbulence heightens again, global growth prospects may weaken further. The rise in inflation will make it more difficult for central banks to use the key rate actively to counter such a development. Weaker growth prospects abroad and at home may in isolation suggest that the key policy rate should be kept unchanged or lowered from the current level. When setting the key rate, Norges Bank must also take into account developments in money market rates and bank lending rates. Money market rates have risen more than that implied by developments in the key policy rate. 14 Forward rates in money and financial markets may indicate that the premium in money market rates is expected to persist. This reduces the need for raising the key policy rate. In the near term, the premium is expected to remain at about 1/4 percentage point higher than that projected in the previous Report. In an environment of intensified competition for deposits, banks must also be expected to increase lending rates more than money market rates in order to maintain profitability. On balance, the outlook and balance of risks suggest that the key policy rate should remain at the current level, or perhaps somewhat higher, in the coming year (see Charts 1.15a-d). The interest rate forecast is somewhat higher than in the previous Report (see Chart 1.16). The prospect of higher inflation is the main factor that pushes up the Chart 1.16 Key policy rate in the baseline scenario in MPR 3/07, MPR 1/08 and MPR 2/08. Per cent. 2006 Q1 – 2011 Q4 9 9 MPR 2/08 8 MPR 1/08 7 MPR 3/07 8 7 6 6 5 5 4 4 3 3 2 2 1 1 0 2006 0 2007 2008 2009 2010 2011 Source: Norges Bank Chart 1.17 Key policy rate and 3-month money market rate1) in the baseline scenario. Per cent. 2006 Q1 – 2011 Q4 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 Key policy rate in the baseline scenario 2 1 3-month money market rate in the baseline scenario 1 0 2006 According to our forecast, the key policy rate will lie just below 6% over the next year before it is reduced somewhat. The key policy rate is projected to be around 1/4 percentage point higher than projected in Monetary Policy Report 1/08. Money market rates are expected to remain at around the current level to year-end (see Chart 1.17). Interest rate setting is aimed at stabilising inflation close to 2.5% over time and gradually bringing down capacity utilisation (see Chart 1.18). In the short term, underlying inflation is still likely to be somewhat higher than 2.5%. If attempts were now made to prevent inflation from remaining somewhat above the target in the short term, the key policy rate would have to be increased markedly. This would imply a break with Norges Bank’s response pattern and might have influenced the stability of consumers’, price-setters’ and market-makers’ expectations in many markets. It might also have led to an abrupt shift in output and employment. 0 2007 2008 2009 2010 2011 1) Projected key policy rate including projected risk premium in the 3-month money market rate. Source: Norges Bank Chart 1.18 Projected inflation and output gap in the baseline scenario. Per cent. 2006 Q1 – 2011 Q4 4 6 3 5 2 4 1 3 0 2 -1 Output gap, left-hand scale -2 1 CPIXE, right-hand scale 1) -3 -4 2006 key policy rate. Expectations of higher central bank key rates abroad also pull in the same direction. Weaker growth prospects push down the interest rate forecast slightly. The contributions to the changes in the interest rate forecast are discussed in a box on page 18. CPI, right-hand scale 0 -1 2007 2008 2009 2010 2011 Interest rate setting can be assessed using simple monetary policy rules, which roughly prescribe an interest rate path based on actual inflation and output. The interest rate estimates derived from the simple rules are based on the projections for output and inflation in 2008 in this Report. The Taylor rule applies the output gap and inflation. The growth rule instead applies GDP growth and inflation. The rule involving external interest rates also takes into account that changes in the interest rate level may result in changes in the exchange rate, thereby influencing the inflation outlook. The simple rules are not forward looking, but only look at current economic developments. The different rules yield somewhat divergent results. The interest rate path in this Report is somewhat lower than the Taylor rule, but somewhat higher than the rule involving external interest rates and the growth rule (see Chart 1.19). 1) CPI adjusted for tax changes and excluding temporary changes in energy prices. Sources: Statistics Norway and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 15 The interest rate profile presented in this Report is broadly in line with the Bank’s previous response pattern (see Chart 1.20).1 Recently the key policy rate has been at the lower end of the interval prescribed by the rule. This is consistent with the fact that some of the monetary policy tightening in this period has come through increased money market premiums, with money market rates increasing more than the key policy rate. Chart 1.19 Key policy rate, Taylor rule, growth rule and rule with external interest rates.1) Per cent. 2007 Q1 – 2008 Q4 9 9 8 8 7 7 6 6 5 5 4 4 Key policy rate 3 Forward interest rates can provide another cross-check of Norges Bank’s interest rate forecast. Under certain assumptions about risk premiums, estimated forward interest rates may reflect market interest rate expectations. Since the previous Report, both short-term and long-term forward interest rates have increased in Norway. Estimated forward rates may now indicate that financial market participants expect a key policy rate of close to 5¾% over the next quarters (see Chart 1.21). This is consistent with the interest rate forecast in this Report. 2 Growth rule 1 0 Mar-07 3 Taylor rule 2 Rule with external interest rates 0 Sep-07 Mar-08 Sep-08 1) The calculations are based on Norges Bank’s projections for the output gap, consumer prices adjusted for tax changes and excluding temporary changes in energy prices (CPIXE) and 3-month money market rate. To ensure comparability with the key policy rate the simple rules are adjusted for the risk premium in the 3-month money market rate. Sources: Statistics Norway and Norges Bank Chart 1.20 Key policy rate and interest rate developments that follow from Norges Bank’s average pattern of interest rate setting.1) Per cent. 2000 Q1 – 2008 Q2 Interest rate movements that follow from Norges Bank’s average pattern with a 90% confidence interval (blue area) 8 8 6 6 The interest rate differential between Norway and other countries is expected to narrow gradually ahead (see Chart 1.22). The effective krone exchange rate is assumed to remain virtually unchanged at the current level in the short term, but to depreciate further out (see Chart 1.23). This reflects the fact that NOK investments cannot be expected to generate a considerably higher real return in the long term than investments in other currencies.2 1 4 4 Key policy rate 2 2 0 Mar-00 0 Mar-02 Mar-04 Mar-06 Mar-08 1) Interest rate movements are explained by developments in inflation, mainland GDP growth, wage growth and 3-month interest rates among trading partners. See Staff Memo 2008/03 for further discussion. Source: Norges Bank Measured by the CPI, inflation may reach 5% in the coming months (see Chart 1.15c). Electricity and petrol prices are still rising so that CPI inflation will be higher than inflation measured by other indicators this year (see Chart 1.24). Underlying inflation, which is now projected to be somewhat higher than 2.5%, is expected to move up further in the months ahead. The effects of the krone appreciation are expected to be more pronounced later this year. This may pull down on inflation. Prices for imported consumer goods have moved on a downward trend over the past 10 years. Higher commodity prices will gradually drive up the rise in prices for imported consumer goods measured in foreign currency. 1 See box in Inflation Report 3/04 2 See box in Monetary Policy Report 1/08 on cross-checks for the krone exchange rate. 16 Chart 1.21 Key policy rate in the baseline scenario and estimated forward rates1). Per cent. 2006 Q1 – 2011 Q4 9 9 8 Estimated forward rates 8 7 Key policy rate in the baseline scenario 7 6 6 5 5 4 4 3 3 2 2 1 1 0 2006 0 2007 2008 1) 2009 2010 2011 Forward rates are based on money market rates and interest rate swaps. A credit risk premium has been deducted when calculating the forward rates to ensure comparability with the key policy rate. The blue interval shows the highest and lowest forward rates in the period 9 June - 20 June 2008. Source: Norges Bank Chart 1.22 Projected differential between money market rates in Norway and among trading partners in MPR 1/08 and MPR 2/08.1) Per cent. 2008 Q2 – 2011 Q4 3 3 MPR 2/08 MPR 1/08 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 2008 2009 2010 2011 1) Differential between money market rate in baseline scenario and weighted average of trading partners’ forward rates in the period 9 June - 20 June 2008. Source: Norges Bank Chart 1.23 Import-weighted exchange rate (I-44) in the baseline scenario in MPR 1/08 and MPR 2/08.1) Index. 2006 Q1 – 2011 Q4 100 100 I-44 MPR 2/08 MPR 1/08 95 95 90 90 85 85 80 2006 80 2007 2008 2009 2010 2011 1) A rising curve denotes a weaker krone exchange rate. The exchange rate path is based on uncovered interest rate parity. Source: Norges Bank Chart 1.24 Projected CPI, CPI-ATE1) and CPIXE2) in the baseline scenario. 4-quarter change. Per cent. 2006 Q1 – 2011 Q4 6 6 CPIXE 5 CPI 5 CPI-ATE 4 4 3 3 2 2 1 1 0 2006 0 2007 2008 2009 2010 2011 When the effects of the krone appreciation of recent years gradually unwind, prices for imported consumer goods are expected to rise again also in NOK terms. The rate of increase in prices for domestically produced goods and services is expected to remain high in the years ahead. Productivity growth is likely to slow markedly for a period, and wage growth is projected at 6% in 2008. The surge in energy prices may also feed through to prices for other goods and services produced in Norway. Against the background of high cost growth and higher prices for imported goods, underlying inflation is projected to remain somewhat above the inflation target for a while and then to move down gradually again and settle close to 2.5%. Household saving is negative and a consolidation of household financial balances must be expected over time. An increase in household interest expenses and cooling housing markets are likely to push down household demand for goods and services and push up saving. Rapid cost growth, tighter lending conditions and lower growth in the global economy will also contribute to moderating activity in the Norwegian economy ahead. Weaker export markets will have an impact on Norwegian export industries, which will affect other industries in Norway. Business investment is expected to remain buoyant this year, but slow next year. Petroleum investment is expected to increase further next year. This will bolster growth in Norwegian petroleum supplier industries. Moreover, higher overall government spending may gradually drive up growth in public spending on goods and services. Also on the upside, high oil prices may boost household expectations and lead to a renewed pick-up in consumption. The supply of foreign labour is expected to continue, but on a somewhat smaller scale than in recent years. When economic growth slows and labour demand shifts down, it will probably become less attractive to move to Norway. Unemployment is expected to edge up from 2009. 1) CPI adjusted for tax changes and excluding energy products. CPI adjusted for tax changes and excluding temporary changes in energy prices. 2) Sources: Statistics Norway and Norges Bank 17 Changes in the interest rate path The interest rate forecast is somewhat higher than the forecast in Monetary Policy Report 1/08 (see Chart 1).1 The forecasts are based on an overall assessment of the situation in the Norwegian and global economies and on our perception of the functioning of the economy. Chart 2 shows a technical illustration of how news and judgement have affected the changes in the interest rate path.2 The calculation can be viewed as an evaluation and consistency check of the forecasts and seeks to provide an indication of how various factors have influenced the interest rate forecasts through their effect on the outlook for inflation, output and employment. The isolated contributions from the different factors are shown in the columns. The overall change in the interest rate forecast is shown by the black line. higher inflation further ahead. This partly through increased investment suggests a higher interest rate (light in the petroleum sector. In isolation, blue columns). this contributes to a somewhat higher interest rate (green columns). Key policy rate expectations among our trading partners have risen. If the Since the previous Monetary Policy expected return on NOK investments Report, the growth outlook for the is to be equal to the expected return global economy has deteriorated. In on investments in foreign currency, isolation, this results in the prospect a rise in external interest rates will, of lower activity in the Norwegian in isolation, lead to a weaker krone. economy, and eventually lower price A weaker krone will result in higher and cost inflation. This suggests a loinflation and increased activity in wer interest rate (red columns). the Norwegian economy. This suggests that the interest rate will also Money market rates in Norway have be raised in Norway. On the other risen more than implied by develophand, the krone has been somewhat ments in the key policy rate. Forward stronger this spring than implied by rates in money and financial markets the expected interest rate differen- indicate that this premium on money tial. In isolation, this contributes to market rates is expected to persist. a somewhat lower interest rate. On This reduces the need to raise the key balance, these conditions neverthe- policy rate and also suggests a lower less suggest a weaker krone exchange interest rate (orange columns). rate and a higher interest rate (dark 1 Changes in the projections for inflation and capacity Inflation in Norway is slightly higher blue columns). utilisation are discussed on page 60. than projected, and the short-term in2 The calculations in the chart have been made using a flation outlook has been revised up- Higher oil and gas prices are proba- small calibrated model for the Norwegian economy (see wards. In isolation, this also points to bly pushing up demand in Norway, Norges Bank Staff memo 2004/3). Chart 1 Key policy rate in the baseline scenario in MPR 1/08 with fan chart and key policy rate in the baseline scenario in MPR 2/08 (red line). Per cent. 2006 Q1 – 2011 Q4 9 9 Chart 2 Factors behind changes in the interest rate path since MPR 1/08. Percentage points. 2008 Q3 – 2011 Q4 2 2 1.5 1.5 1 6 6 1 0.5 0.5 0 -0.5 3 -1 3 -1.5 90% 0 Mar-06 70% 50% 30% -2 Mar-08 Source: Norges Bank Mar-09 Mar-10 Mar-11 Changes in the interest rate path Higher demand in Noway1) Higher inflation in Norway2) Higher interest rates abroad and developments in the foreign exchange market3) Lower growth abroad4) Higher risk premium in the money market5) 1) -1 -1.5 -2 Reflects effects of higher growth in demand in Norway due to higher oil and gas prices. Reflects effect of higher inflation than what can be accounted for by changes in capacity utilisation in Norway. 3) Reflects effects of expectations of higher key policy rates among trading partners, through effects on the krone exchange rate, and effects of the development in the krone exchange this spring over and above the effects of changes in interest rate expectations abroad. 4) Reflects effects of expectations of lower growth in the world economy. 5) Reflects effects of higher risk premium in the money market in Norway. 2) Source: Norges Bank 18 -0.5 08 Q3 09 Q1 09 Q3 10 Q1 10 Q3 11 Q1 11 Q3 0 Mar-07 0 Uncertainty surrounding the projections The projections for inflation, output, the key policy rate and other variables are based on our assessment of the current situation and our perception of the functioning of the economy. There is uncertainty surrounding future developments in inflation and output, and hence interest rate developments. The fan charts illustrate the uncertainty surrounding our projections (see Charts 1.15a-d).3 The wider the fan charts, the more uncertain the projections are. The width of the fan charts is based on historical disturbances, and therefore expresses the average that covers periods of higher and lower uncertainty.4 The uncertainty interval around the interest rate reflects the fact that monetary policy reacts to developments in inflation and output. This adds to the uncertainty surrounding interest rate developments ahead, but also reduces the uncertainty surrounding developments in inflation and output. In our assessment, the probability that inflation, output and employment will be higher than projected is the same as the probability that these variables will be lower than projected. This is reflected in the equal width of the fan charts on both sides of the projections. The uncertainty surrounding the projections for CPI inflation is estimated in the fan chart in Chart 1.15c. The chart shows that the probability that inflation will be higher than 3.5% in 2011 is estimated at around 20%. The probability that inflation will fall back below 1.5% in 2011 is about 20%. Alternative scenarios If economic developments are broadly in line with our projections, economic agents can also expect that the interest rate path will be closely in line with that projected. However, the current interest rate path may shift if economic prospects change or if the effect of interest rate changes on output, employment and inflation is different from that assumed. Interest rate setting must be assessed in the light of the reasons for and the expected duration 3 There is also uncertainty about the current situation (see boxes in Inflation Report 3/05 and 3/06) 4 A further description of the fan charts is provided in Inflation Report 3/05 NORGES BANK MONETARY POLICY REPORT 2/2008 19 of the disturbances that arise. The later monetary policy responds to such disturbances, the wider the fluctuations in output and inflation will be. In addition, it may be difficult to distinguish between erratic statistical effects and more long-lasting disturbances. It may therefore take time before interest rate setting can be based on economic developments that differ from the projected path. Inflation may prove to be higher than currently projected. In recent cyclical upturns, high pay increases were awarded in a late phase of the upswing. This seems to be recurring this year. Even though the outcome of this year’s wage settlements is consistent with our projections so far, wage drift may be high into autumn. Productivity growth may be lower than projected. The results of this year’s agricultural settlement indicate a marked price increase for agricultural products from 1 July. It is uncertain how the agricultural settlement and the rises in global energy and food prices will affect inflation in Norway. Moreover, inflation is on the rise in other countries, which may result in a faster increase in prices for imported goods. Charts 1.25a-c (red lines) illustrate a path where inflation turns out to be higher than projected.5 The technical assumption is made that inflation will be ¼ - ½ percentage point higher than in the baseline scenario in the year ahead. It would then be appropriate to increase the key policy rate to a level that causes the real interest rate to rise, bringing inflation over time back to target. A higher interest rate will lead to a lower level of capacity utilisation than in the baseline scenario. This has a dampening impact on inflation, but inflation will still be somewhat higher than in the baseline scenario in the years ahead. Chart 1.25a Key policy rate in the baseline scenario and in the alternatives with higher and lower inflation. Per cent. 2006 Q1 – 2011 Q4 9 9 Lower inflation 8 7 8 Higher inflation 7 Baseline scenario 6 6 5 5 4 4 3 3 2 2 90% 1 0 Mar-06 70% 50% 30% 1 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Source: Norges Bank Chart 1.25b The output gap in the baseline scenario and in the alternatives with higher and lower inflation. Per cent. 2006 Q1 – 2011 Q4 5 5 Lower inflation 4 Higher inflation 4 3 Baseline scenario 3 2 2 1 1 0 0 -1 -1 90% -2 -3 Mar-06 70% 50% 30% -2 -3 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sources: Statistics Norway and Norges Bank Chart 1.25c CPIXE1) in the baseline scenario and in the alternatives with higher and lower inflation. 4-quarter change. Per cent. 2006 Q1 – 2011 Q4 5 5 Lower inflation Charts 1.25a-c (yellow lines) illustrate a path where inflation turns out to be lower than projected. Several factors may contribute to lower inflation. Household saving may increase faster than expected, and the effects of slower global growth on the Norwegian economy may be underestimated. This may gradually lead to an easing of infla- 4 3 3 2 2 90% response pattern is known and consistent over time. This is further explored in Bergo, J. 1) 2007. 20 1 1 0 Mar-06 Seminar of the Association of Norwegian Economists at Sanderstølen on 26 January 4 Baseline scenario 5 The projections in the charts are based on the assumption that Norges Bank’s (2007) “Interest rate projections in theory and practice”, speech at the Foreign Exchange Higher inflation 70% 50% 30% 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 CPI adjusted for tax changes and excluding temporary changes in energy prices. Sources: Statistics Norway and Norges Bank tion. It may then be appropriate to lower the interest rate earlier than in the baseline scenario in order to hold up inflation expectations and bring inflation back to target. Oil prices have doubled over the past year. This has been accompanied by a sharp increase in forward electricity prices on the Nordic power exchange Nord Pool. It is uncertain to what extent such a large increase in energy prices will influence economic growth and inflation in Norway.6 Rising activity in the petroleum sector and higher earnings in the business sector may result in a sustained rise in business investment. Increased government revenues and high growth in government spending may fuel consumption. Capacity utilisation may remain high longer than projected in this Report and inflation may rise further. Somewhat further out, this scenario may crowd out production in internationally exposed industries that are not petroleum sector suppliers, but it is uncertain how fast and to what extent this will occur. The krone exchange rate may appreciate further and amplify this effect. If high oil prices translate into higher-than-projected inflation or if energy prices continue to drift up, the interest rate may be higher than projected. On the other hand, a more pronounced downturn in the world economy may lead to a further slowdown in activity in the Norwegian export industry, with spillover effects on other business sectors. In addition, the risk of a fall in oil prices and prices for other Norwegian export goods will increase. This may lead to considerably weaker developments in the Norwegian economy than in the baseline scenario. At the same time, a fall in oil prices may result in a weaker krone. The effects on inflation in Norway under this scenario are uncertain. If the effects on the activity level dominate, it may be appropriate to reduce the interest rate. If the effects on the krone exchange rate dominate, it may be appropriate to maintain a tight monetary policy stance. 6 See Economic Commentaries 2/08: ”Effects of high oil prices on the Norwegian economy”, www.norges-bank.no, 26 June 2008. NORGES BANK MONETARY POLICY REPORT 2/2008 21 Summary Inflation has been slightly higher than projected. On the whole underlying inflation is close to, but somewhat higher than 2.5%. Capacity utilisation is still high. Unemployment is at a historically low level and wages are rising rapidly. The upturn in Norway is entering a new phase. A period of low inflation and high growth is now being followed by somewhat higher inflation and lower growth. Global growth prospects have weakened. Interest rate expectations abroad have nevertheless shown a marked upward shift. Inflation has increased in many countries. It seems that an increased risk of rising inflation has led to higher real interest rates. Financial market conditions have improved somewhat since March, but money market rates are still considerably higher than developments in central bank key rates would normally imply. Since last summer, Norwegian bank lending rates have increased in pace with money market rates, but bank lending margins are low. The increase in inflation, prospects of rising inflation and the consideration of anchoring inflation expectations close to the target suggest that the key policy rate should be raised further. Expectations of higher central bank key rates abroad pull in the same direction. Weaker growth prospects abroad and at home may in isolation suggest that the key policy rate should be kept unchanged or lowered from the current level. On balance, the outlook and balance of risks suggest that the key policy rate should remain at the current level, or perhaps somewhat higher, in the coming year. The projections are uncertain. New information may reveal aspects of economic developments that indicate that the Norwegian economy is moving on a different path than projected. On the one hand, unexpectedly high cost growth or a weaker krone may lead to higher-than-projected inflation. The effect of the agricultural settlement and higher global energy and food prices on inflation in Norway is also uncertain. On the other hand, if the effects of the global slowdown on the Norwegian economy are stronger than expected or if the krone appreciates markedly, inflation may be lower than projected in this Report. Executive Board’s strategy The key policy rate should be in the interval 5¼% – 6¼% in the period to the publication of the next Monetary Policy Report on 29 October, unless the Norwegian economy is exposed to major shocks. 22 Monetary policy since the previous Report Norges Bank’s projections for economic developments in Monetary Policy Report 1/08 – presented on 13 March 2008 – implied a key policy rate in the interval 5% - 6% in the period to 25 June 2008, unless the Norwegian economy was exposed to major shocks. The analyses in the Report implied that the key policy rate might be raised further in the period to summer. Prospects for sharper price and cost inflation would in the short term more than offset the effect of weaker global economic growth. In Monetary Policy Report 1/08 it was pointed out that unexpectedly high cost inflation, higher import prices or a weaker krone might lead to a faster-than-expected pickup in inflation. It was also noted that if the global downturn had a stronger-than-expected impact on the Norwegian economy, or if the krone appreciated markedly, inflation might be lower than projected. At the monetary policy meeting on 13 March, the Executive Board stated that although different indicators of inflation showed slightly different developments, on the whole underlying inflation was close to 2.5%. Growth in the Norwegian economy remained buoyant and was unexpectedly high towards end-2007. Capacity utilisation was high and the labour market was tight. On the other hand, the global economic outlook had deteriorated. Interest rates were decreasing in the US and a number of other countries. The krone had appreciated. Enterprises in Norges Bank’s regional network were still expecting an increase in activity ahead, albeit smaller than previously. Increasing the interest rate was an alternative, but an overall assessment implied that it was appropriate to leave the interest rate unchanged at 5.25%. sisted, and global economic developments might prove to be weaker than previously assumed. Risk premiums in international money and credit markets had remained high, and borrowing costs had risen for enterprises and financial institutions. New information since the previous monetary policy meeting did not on balance warrant a deviation from the strategy in Monetary Policy Report 1/08. The key policy rate was raised by 0.25 percentage point to 5.50% at that meeting. At the monetary policy meeting on 28 May, the key policy rate was kept unchanged at 5.50%. The Executive Board pointed out that inflation was higher than projected. Oil prices had increased further to a very high level. The rise in energy and food prices was pushing up inflation in many countries, and global interest rate expectations had risen. The wage settlements indicated as expected that wage growth in Norway was rising. Overall, underlying inflation was close to, but somewhat above 2.5%. Capacity utilisation in the Norwegian economy was still high, but there were as expected signs of dampened economic growth. There were prospects of slower growth in the global economy. The increase in inflation and prospects for rising inflation suggested that the key policy rate should be raised further. With financial market turbulence, high risk premiums in money markets and uncertainty as to global developments, it was nevertheless on balance appropriate to leave the key policy rate unchanged. Chart 1 Interval for the key policy rate at the end of each strategy period and actual developments.1) Per cent. 2 January 2004 – 25 June 2008 9 9 8 8 7 7 1/08 6 1/07 5 At the monetary policy meeting on 23 April, the Executive Board noted that inflation had increased markedly since last autumn. The first wage settlements indicated rising wage growth in line with the projections. Prospects for higher inflation suggested that the key policy rate should be increased. On the other hand, the US economy was weak. Financial market turbulence per- NORGES BANK MONETARY POLICY REPORT 2/2008 4 3 1/04 2/04 3/04 1/05 2/05 3/05 2/06 1/06 4 3 2 2 1 6 5 3/06 Strategy period 3/03 2/07 3/07 1 Key policy rate 0 Jan-04 0 Jan-05 Jan-06 Jan-07 Jan-08 1) The Executive Board’s decision of 25 June is not shown in the chart (see Table on page 75). Source: Norges Bank 23 2 The global economy, financial markets and commodity markets Inflation and interest rates on the rise Inflation among our trading partners has risen more quickly and to a further extent than anticipated in the previous Report. Prices for food, oil and other commodities have climbed sharply over the past year, leading to a substantial increase in consumer prices in both industrial and emerging market economies (EMEs) (see Charts 2.1 and 2.2). In industrial countries, core inflation, i.e. excluding energy and food, has not risen to the same degree, and there has been only a moderate increase in wages, but producer prices for manufactured goods have accelerated. Since the previous Report, households’ inflation expectations for the coming year have continued to rise in the US, but have been stable at a high level in the euro area. Market participants’ five-year inflation expectations seem to have risen slightly in both the US and Europe. In EMEs, core inflation has risen faster than in industrial countries. With strong growth in EMEs, there is a risk that the increase in energy and food prices will continue to feed through to a wide range of goods and services. In EMEs, food accounts for a high share of consumption. Both wage growth and producer price inflation are high and rising in the BRIC countries (Brazil, Russia, India and China) (see Chart 2.3). Chart 2.1 Consumer prices in industrial countries. 12-month change. Per cent. January 2000 – May 2008 6 6 US UK Japan Euro area 4 4 2 2 0 0 -2 2000 -2 2002 2004 2006 2008 Source: Thomson Reuters Chart 2.2 Consumer prices in BRIC countries1). 12-month change. Per cent. January 2000 – May 2008 30 30 Brazil 25 25 Russia 20 India, wholesale prices China 15 20 15 10 10 5 5 0 0 -5 2000 1) -5 2002 2004 2006 2008 Brazil, Russia, India and China. Source: Thomson Reuters Chart 2.3 Producer and wholesale prices in BRIC countries1). 12-month change. Per cent. January 2000 – May 2008 50 50 Brazil, wholesale prices The risk of a permanent impact on inflation expectations from higher energy and food prices is probably the main factor behind the marked interest rate increases in Norway and abroad since the previous Report. In the US, the euro area and the UK, two-year interest rates have risen by around 1¼ percentage point, and the expected one-year real interest rate has increased in both the US and the euro area (see Chart 2.4). In both Europe and the US, market participants have markedly revised up their central bank key rate expectations. Many central banks will probably 24 Russia 40 40 India, wholesale prices China 30 30 20 20 10 10 0 -10 2000 1) 0 -10 2002 Brazil, Russia, India and China. Source: Thomson Reuters 2004 2006 2008 Chart 2.4 Expected real interest rate1) one year ahead in the US and the euro area. 10-day moving average. Per cent. 1 January 2007 – 20 June 2008 gear monetary policy towards preventing a permanent feed-through to inflation expectations in the business and household sector from the increase in inflation. 3.5 3.5 US Euro area 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 Jan-07 The projection for consumer price inflation among our trading partners has been revised up by ¾ percentage point in 2008 and ½ percentage point in 2009. We expect the rise in food, energy and other commodity prices to slow and gradually contribute to lower inflation (see Table 2.1). We assume that a tighter monetary stance and slower growth in both industrial countries and EMEs will limit the knock-on effects on prices for other goods and services. In the longer term, continued real income growth in EMEs may nevertheless lead to a more rapid rise in prices for their exports than previously. 0.0 May-07 Sep-07 Jan-08 May-08 1) One-year maturity. The real interest rate is derived from nominal swap rates and inflation swaps. Sources: Bloomberg, Thomson Reuters and Norges Bank Table 2.1 Projections of consumer prices in other countries. Change from previous year. Per cent Sharp rise in energy prices 2008 2009 2010-20111) 4 2½ 2¼ 3½ 2¼ 2 1 ¾ 1 UK 3½ 2¾ 2 Sweden 3¾ 3 2 7 4½ 3¾ 3½ 2½ 2 US Euro area2) Japan China Trading partners3) 1) Average annual rise. 2) Weights from Eurostat (each country’s share of total euro area consumption). 3) Import weights. 26 trading partners. Source: Norges Bank Chart 2.5 Oil price (Brent Blend) in USD, EUR, NOK and SDR. Monthly figures. January 2000 – May 2008 700 120 USD, left-hand scale 600 EUR, left-hand scale 100 SDR, left-hand scale 500 NOK, right-hand scale 80 400 60 300 40 200 20 100 0 2000 0 2002 2004 2006 2008 Source: Thomson Reuters NORGES BANK MONETARY POLICY REPORT 2/2008 The price of oil (Brent Blend) has averaged USD 108 per barrel so far this year (see Chart 2.5). This is USD 36 more than the average for 2007. The price of a barrel of oil has increased by USD 27 since the previous Report. Growth in oil consumption remains firm in non-OECD countries, especially in Asia, the Middle East and Latin America. At the same time, there has been limited growth in non-OPEC oil production. Since summer 2007, the International Energy Agency (IEA) has gradually revised down its forecast for oil consumption growth in 2008, especially in the OECD countries as a result of higher oil prices and weaker economic growth. The IEA has also revised down its growth forecast for non-OPEC oil production. Oil prices have continued to climb recently. Crude and distillate inventories in the OECD countries suggest that the market balance is fairly tight. It is very uncertain whether OPEC – in particular Saudi Arabia – has sufficient spare production capacity to make up for any loss of production in key member countries such as Iraq, Iran, Nigeria and Venezuela (see Chart 2.6). There has been a particularly strong increase in longterm futures prices. The price of the contract maturing in December 2015 has risen by USD 39 since the previous Report. This probably reflects the problems that 25 non-OPEC producers in particular will have in satisfying continued strong growth in oil consumption in EMEs in the coming years. Chart 2.6 OPEC surplus crude oil production capacity. Million barrels per day. 1997- 20091) 6 6 Surplus production capacity Average 1997-2007 The US dollar depreciation and low global interest rates may have contributed to the sharp increase in oil prices in USD terms.1 Low real interest rates cut the cost of oil inventories and make oil and other commodities more interesting as financial investment alternatives. The supply of oil may also be lower than otherwise because it is more profitable to postpone production and in practice store oil in the ground when oil revenues invested in financial markets generate a smaller return. As previously, the oil price path in this Report is based on futures prices (see Chart 2.7). These prices now imply an oil price of USD 122 in 2008 and USD 136 in 2009, which is USD 22 and USD 38 higher respectively than in the previous Report.2 In mid-June, analysts regularly surveyed by Bloomberg expected on average an oil price of USD 113 in 2008 and USD 109 in 2009. In recent years, analysts have generally forecast a lower oil price than implied by futures prices, which may reflect greater concern about the effects of high oil prices on global economic growth. Global demand for oil may be lower if global economic growth is weaker than now expected. Higher end-user prices in several EMEs due to reduced subsidies and regulation of petroleum products are working in the same direction. On the other hand, oil supply growth may once again be lower than expected. Unrest in important oilexporting countries may again lead to a shortfall in oil production. Moreover, the hurricane season in the Gulf of Mexico may be worse than in the past two years and further delays and cost increases may hamper new projects. Prices in the options market for US benchmark crude West Texas Intermediate can be used to derive market participants’ view of the uncertainty associated with future 1 See Economic Commentaries 1/08 “The rise in oil prices – fundamental and financial factors”, www.norges-bank.no, 26 June 2008. 2 The increase from 2008 to 2009 is due primarily to the price rise since the beginning of this year. Futures prices are also slightly higher than the spot price. 26 4 4 2 2 0 0 1997 1) 1999 2001 2003 2005 2007 2009 Forecast for 2008 and 2009. Source: Energy Information Administration Chart 2.7 Oil price (Brent Blend) in USD per barrel. Daily figures. 3 January 2000 – 20 June 2008. Futures prices. 10 March 2008 and 20 June 2008 (broken lines). April 2008 – December 2010 150 150 Brent Blend 125 MPR1/08 125 MPR2/08 100 100 75 75 50 50 25 25 0 2000 0 2002 2004 2006 2008 2010 Sources: Thomson Reuters and Norges Bank Chart 2.8 Oil price (Brent Blend) and average export price for Norwegian natural gas1). The oil price has been moved back 2 quarters. 1981 Q1 – 2008 Q1 500 2.5 Gas price (NOK per Sm3, left-hand scale) 2.0 Oil price (NOK per barrel, right-hand scale) 400 1.5 300 1.0 200 0.5 100 0.0 1981 0 1986 1991 1996 2001 2006 1) Gas prices from 1981 Q1 to 2007 Q1 were obtained from SN. Gas prices from 2007 Q2 were obtained from StatoilHydro’s quarterly accounts. Sources: Statistics Norway, Thomson Reuters, StatoilHydro and Norges Bank Chart 2.9 Average prices for crude oil and natural gas. Quarterly figures. 2000 Q1 – 2008 Q21) 140 500 400 300 UK gas in USD/1000Sm3, lefthand scale Russian gas in USD/1000Sm3, left-hand scale Average StatoilHydro in USD/1000Sm3, left-hand scale Brent Blend per barrel in USD, right-hand scale 120 100 80 60 200 40 100 20 0 2000 0 2002 2004 2006 2008 1) For 2008 Q2 the average of daily figures 1 April – 20 June 2008 is used for Brent Blend and UK gas. For Russian gas the monthly figures for April and May are used for 2008 Q2. Sources: Statistics Norway, Thomson Reuters, StatoilHydro, IMF and Norges Bank Chart 2.10 International commodity prices in USD. Index, 2000 = 100. Week 1 2000 – week 25 2008 350 350 300 250 Metals Food 300 Industrials Non-food agriculturals 250 All items 200 200 150 150 100 100 50 50 2000 2002 2004 2006 2008 Sources: Thomson Reuters and The Economist Chart 2.11 Metal prices in USD. Index, 4 January 2000 = 100. 4 January 2000 – 20 June 2008. Futures prices from 20 June 2008 (broken lines). August 2008 – October 2010 700 700 Aluminium 600 500 600 Copper Nickel 500 Zinc 400 400 300 300 200 200 100 100 0 2000 0 2002 2004 2006 2008 2010 Sources: Thomson Reuters and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 oil prices. In mid-June, options prices implied that it is substantially more likely that oil prices will be above USD 150 than below USD 100 per barrel at the end of 2008. The price of Norwegian gas is also rising (see Chart 2.8). This is because long-term sales contracts are largely linked to prices for oil products. Some of the Norwegian gas is also sold in the spot market in the UK. As the UK is importing more and more gas from continental Europe, and gas prices there follow oil prices, the price of gas in the UK will mirror oil prices more closely than before. Given the rise in oil prices since last summer and a continued increase in UK gas prices thus far in Q2, the price of Norwegian gas will likely continue to climb (see Chart 2.9). Futures prices for UK gas also indicate a continued moderate increase through the remainder of 2008 and into 2009. Prices for other commodities are also high. The Economist commodity-price index so far this year has been 24% higher than the average for 2007, but has fallen back slightly since the previous Report (see Chart 2.10). Prices for industrial metals have fallen somewhat since the previous Report due to the weaker global economic outlook, but the decrease is only modest relative to the increase in recent years. The rise in metal prices can be attributed to several of the same factors that have led to high oil and gas prices. Growth in the BRIC countries and other EMEs remains high. At the same time, supply has so far not been very flexible. It has taken several years to expand production capacity due to a shortage of skilled labour, intermediate goods and electrical power. There have also been several temporary production disturbances due to strikes and other actions. Metal inventories fell sharply in 2004 and have remained low since. Futures prices suggest that market participants expect prices for industrial metals to remain high in the coming years (see Chart 2.11). Prices for food and other agricultural products have both increased by 4% since the previous Report. Wheat prices have fallen by 24% in this period while corn prices have risen by 30% (see Chart 2.12). High food prices 27 reflect several conditions. Increased biofuel production and higher consumption in EMEs have boosted demand for food. Adverse weather conditions and higher energy prices have curbed growth in food production. Several countries have introduced export restrictions to protect domestic markets from high food prices. One result of this has been the recent increase in rice prices. However, the forward curves suggest that market participants anticipate virtually unchanged food prices in the coming years (see Chart 2.12). Freight rates for dry bulk (Baltic Dry Index) have increased by 9% since the previous Report, while tanker rates have climbed 75% (see Chart 2.13). Rising freight rates and persistently high commodity prices would indicate that the global economy is not facing an imminent sharp decline in goods production or demand for commodities. Chart 2.12 Food commodity prices in USD. Index, 4 January 2000 = 100. 4 January 2000 – 20 June 2008. Futures prices from 20 June 2008 (broken lines). September 2008 – December 2010 600 600 Wheat Soyabeans 500 500 Maize 400 400 Coffee 300 300 200 200 100 100 0 2000 0 2002 2004 2006 2008 2010 Sources: Thomson Reuters, Chicago Board of Trade, The Intercontinental Exchange and Norges Bank Chart 2.13 Freight rates. Index based on rates in USD. Tank: World Scale MidEast-West. Dry bulk: Baltic Dry Index. 4 January 2000 – 20 June 2008 400 12000 Continued stress in financial markets The global financial turmoil reached a peak in mid-March. After JPMorgan took over the investment bank Bear Stearns with credit from the Federal Reserve, there were signs of a change of sentiment in financial markets. Investors’ risk appetite increased during spring. Global equity prices advanced in the period after the previous Report was published (see Chart 2.14), but have since fallen back again. Equity prices on the Oslo Stock Exchange have also fallen recently, but are still substantially higher than in mid-March. Money market premiums have remained high. The difference between money market rates and expected central bank key rates reflects the risk premium that banks and others must pay for unsecured loans in the money market. The premiums for money market loans with maturities of three months or more are considerably higher than for shorter loans (see Chart 2.15). This reflects both an expectation that premiums will remain high and the fact that credit risk increases with the maturity of a loan. Money market funds are an important source of liquidity in money markets. One reason for the tightening of money 28 Baltic Dry Index, left-hand scale 10000 Tank, right-hand scale 300 8000 200 6000 4000 100 2000 0 2000 0 2002 2004 2006 2008 Source: Thomson Reuters Chart 2.14 Developments in equity markets. Index, 1 January 2007 = 100. 1 January 2007 – 20 June 2008 160 140 160 Emerging economies Euro area US Japan Oslo Stock Exchange 140 120 120 100 100 80 80 60 Jan-07 60 May-07 Sep-07 Source: Thomson Reuters Jan-08 May-08 Chart 2.15 Spread between money market rates with different maturities and expected key policy rate1). Average for the US, the euro area and the UK. Percentage points. 5-day moving average. 1 June 2007 – 20 June 2008 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 1-month 3-month 12-month 0.0 Jun-07 Sep-07 Dec-07 0.2 0.0 Mar-08 Jun-08 It may take time for confidence among banks to be restored. It is also possible that premiums on unsecured loans will remain permanently high, and that loans against collateral will also gradually become more common in the money market. 1) The expected key policy rate is derived from the Overnight Index Swap (OIS). Sources: Bloomberg and Norges Bank Chart 2.16 Developments in the tomorrow/next rate and the key policy rate. Percentage points. 2 January 2008 – 20 June 2008 6 6 Tomorrow/next rate 4 4 Key policy rate 2 0 Jan-08 2 0 Feb-08 Mar-08 Apr-08 May-08 markets seems to be that these funds have reduced their supply of unsecured loans to banks except for very short maturities. At the same time, many banks have higher funding needs after the turmoil started, because they took back securities and loans onto their own balance sheets from vehicles that they themselves had set up. The uncertainty surrounding both their own and other banks’ future liquidity remains high, due partly to potential losses associated with low-grade securities. Even solid banks may wish to have an extra liquidity buffer in uncertain times. The combination of reduced supply and increased demand in money markets has led to higher premiums. Jun-08 Source: Thomson Reuters As a result of premiums in the Norwegian money market and higher interest rate expectations, market expectations of money market rates are higher than at the time the previous Report was published. Money market premiums are expected to remain high for some time. In Norway, very short-term money market rates were relatively volatile in April and May. The spread between the shortest money market rates and the sight deposit rate was higher than usual at times (see Chart 2.16). There was a need to supply very large amounts of liquidity to the banking system in April and May due to large tax payments. Norges Bank provided liquidity through a number of fixed-rate loans (F-loans).3 Given the prospect of banks having substantial borrowing needs from April to June, the Bank also offered an F-loan with a longer maturity than usual. Despite a stable supply of liquidity, the shortest money market rates increased again in the second half of May. The F-loans were not sufficient to cover needs. When Norges Bank is unable to supply sufficient liquidity through F-loans, it can supply NOK through foreign 3 F-loans are an instrument used primarily to supply liquidity to the banking system. They are issued against collateral in the form of securities, carry a fixed rate of interest and have a fixed maturity. The maturity depends on the liquidity situation in the banking system. See www.norges-bank.no for a more detailed account. NORGES BANK MONETARY POLICY REPORT 2/2008 29 exchange swaps. In these swaps, loans are offered against collateral in USD. Both Norwegian and foreign banks active in the Norwegian money market may bid for these loans. Norges Bank supplied liquidity through a foreign exchange swap on 22 May and again on 30 May. The actual amount borrowed was NOK 32.5bn and 10.1bn respectively. Outstanding F-loans in the same period totalled NOK 120-130bn. In credit markets, premiums have remained high, but are lower than in mid-March. Chart 2.17 shows that credit premiums for companies with high credit ratings have decreased in both the US and the euro area. In EMEs, the spread against the US 10-year Treasury yield has decreased by 40 basis points since the previous Report. Prices for bond credit default insurance (credit default swaps) are also lower now than in mid-March for both banks and other companies. Volatility in the foreign exchange market has decreased since mid-March. Volatility between the major currencies, as measured by the GRI4, has fallen back from the highest levels since January 2001 (see Chart 2.18), but is still considerably higher than before the turbulence erupted last summer. During the period of financial turmoil, investors have been cautious about engaging in carry trade. Since March, low-yielding currencies such as the Japanese yen and Swiss franc have weakened. In mid-March, the effective US dollar exchange rate was at a historical low. The US dollar has since strengthened by 3.0%. The effective euro exchange rate has also strengthened, while the effective sterling rate has weakened by 2½% due to the prospect of markedly weaker growth in the UK economy. The Norwegian krone has weakened slightly since the previous Report. The increase in oil prices during the period would, in isolation, point to a stronger krone, while a slightly smaller interest rate differential against other countries indicates a weaker krone. In periods of market turmoil, high volatility and reduced risk appetite, it is also 4 Global Risk Indicator. The GRI reflects uncertainty in currency markets by weighting implied volatility from options on exchange rates between the USD, EUR and JPY. See Economic Bulletin 4/2000 for a more detailed account. 30 Chart 2.17 Credit spreads on bonds with 10-year maturities. Percentage points. 2 January 2003 – 20 June 2008 8 8 Euro area US 6 6 Emerging economies 4 4 2 2 0 2003 0 2004 2005 2006 2007 2008 Source: Thomson Reuters Chart 2.18 Global Risk Index (GRI). Expected volatility between USD, euro and JPY in per cent. 1 January 2001 - 20 June 2008 21 21 18 18 15 15 12 12 9 9 6 6 3 3 0 2001 0 2003 2005 Source: Thomson Reuters and Norges Bank 2007 Chart 2.19 Import-weighted exchange rate I-441). 3 January 1994 - 20 June 2008 120 120 110 110 100 100 90 90 80 1994 1) 80 1997 2000 2003 2006 A rising curve denotes a weaker krone exchange rate. Source: Norges Bank Chart 2.20 Real exchange rates (relative consumer prices and labour costs in common currency). Deviation from average 1970 – 2007. Per cent. 1970 – 20081 ). Terms of trade. Index, 1995 = 100. 195 25 Terms of trade, left-hand scale 180 20 Relative prices 15 Relative wages 165 The krone is strong by historical standards. Based on the I-44 import-weighted index, the krone is only 3½% weaker than at its strongest in January 2003 (see Chart 2.19). The real exchange rate, whether based on relative consumer prices or relative labour costs, is at its highest level since 1970 (see Chart 2.20). The appreciation of the real exchange rate in recent years has been accompanied by a substantial improvement in Norway’s terms of trade and high economic growth. 10 150 5 135 0 120 -5 105 -10 90 -15 1970 1) not uncommon for market participants to reduce their exposure to less liquid currencies such as the Norwegian krone. This has affected the krone at times since last summer. Should the turmoil subside, interest rate differentials and other real economic conditions may become more important again for NOK. On the other hand, Norway is running a current account deficit, adjusted for transfers to the Government Pension Fund – Global and oil companies’ estimated cash surplus.5 In isolation, this points to a weaker krone. 1977 1984 1991 1998 2005 Figures for 2008 are based on data until 20 June 2008. Sources: Statistics Norway, Tech. Reporting Committee on Income Settlements, Ministry of Finance and Norges Bank Chart 2.21 Import-weighted exchange rate I-441). Historical and estimated exchange rate. 1 July 2007 – 31 December 2008 93 93 Actual I44 Projected Q4 Model estimated exchange rate (historically) Projected Q3 Model estimated exchange rate (future) 91 91 89 89 87 87 85 Jul-07 85 The forecasts in this Report are based on some strengthening of the krone from Q2 to Q3 this year (see Chart 2.21). This is in line with the predictions from a model where the krone exchange rate is determined by oil prices and the interest rate differential against Norway’s trading partners.6 Since last autumn, the krone exchange rate as measured by the I-44 index has generally been slightly weaker than the model indicates. The financial turmoil may have kept the krone weaker than it would otherwise have been. Subsiding financial market turbulence may cause the krone to appreciate and move closer to the level indicated by the model. The krone is expected to depreciate somewhat from Q3 to Q4 this year. Once account is taken of the expected decrease in the interest rate differential against trading partners, the projections from the model suggest a similar movement. The krone has also shown a tendency in recent years to weaken towards the end of the year. 5 The basic balance is a very uncertain variable, but is estimated at around NOK -118bn 1) Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 A rising curve denotes a weaker krone exchange rate. Source: Thomson Reuters and Norges Bank in 2008. It is defined here as the surplus on the current account adjusted for the year’s transfers to the Government Pension Fund – Global and the portion of oil companies’ foreign currency revenue that is retained in foreign currency (see box in Inflation Report 3/04). 6 See box in Monetary Policy Report 1/08 for a more detailed account of this model. NORGES BANK MONETARY POLICY REPORT 2/2008 31 Prospect of lower global economic growth Economic growth in Q1 was higher than expected in the US, Europe and Japan. We nevertheless expect growth ahead to be somewhat lower than assumed in the previous Report. There are several reasons for this. The fall in house prices in the US and parts of Europe is dragging down construction activity and reducing the scope for using property as collateral for consumer loans. Banks and other financial institutions still have to record large losses due to the problems in housing and financial markets. Lending capacity has decreased, and financial institutions in both the US and Europe are continuing to tighten their lending standards. Financing costs for enterprises and households have remained high or increased in the US and Europe (see Charts 2.22 and 2.23). The sharp increase in energy and food prices will curb growth in real household income and corporate profits. Virtually stagnating growth in the US and a weaker US dollar will limit US imports of goods and services. If the markedly higher energy prices and higher capital costs owing to the financial turmoil persist, the potential for growth in output in the global economy may be diminished. The crisis in the US housing market is still in evidence. The fall in housing investment and house prices has accelerated (see Chart 2.24). The problems in the housing market, lower employment, falling wage growth, rapid increases in energy and food prices, and reduced availability of credit have reduced consumer confidence to its lowest levels since 1993 (see Chart 2.25). The effects of fiscal policy measures, such as cash payments from the government to stimulate consumption, will be exhausted towards the end of the year. We expect growth in private consumption to slow again in 2009. Tighter credit conditions and weaker corporate profitability are putting a damper on investment. The effective US dollar exchange rate has fallen by around 10% over the past year, and foreign trade is expected to help prop up aggregate demand. We assume that US growth will not pick up until the latter half of 2009 and into 2010. Chart 2.22 Interest rates in the US. Per cent. 3 January 2005 – 20 June 2008 7 7 6 6 5 5 4 4 3 Policy rates 3 2 Mortgage lending rates 1) 2 1 Corporate benchmarks 2) 1 0 0 2005 1) 2) 2006 2007 2008 Freddie Mac, 30-year, fixed rate. Based on weekly figures. BBB Rated, 5 Years. Sources: Thomson Reuters and Norges Bank Chart 2.23 Interest rates in the euro area. Per cent. 3 January 2005 – 20 June 2008 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 2005 2006 2007 2008 1) New loans, excluding bank overdrafts, 5 – 10 year. Based on monthly figures. New Loans, 1 Million EUR +, excl. bank overdrafts, 5 Year +. Based on monthly figures. 3) BBB Rated, 5 Years. 2) Sources: Thomson Reuters and Norges Bank Chart 2.24 House prices in the US and Europe. 4-quarter change. Per cent. 2000 Q1 – 2008 Q2 30 30 20 20 10 10 0 0 Denmark Ireland 2) Spain US 2) UK 1), 2) -10 -20 2000 1) 2) -10 -20 2002 2004 2006 2008 UK 2008 Q2 is calculated as the average of April and May 2008. The figures for US, UK and Ireland are based on monthly figures. Sources: Thomson Reuters and Norges Bank 32 7 Policy rate Loans for house purchases 1) Loans to non-financial corporations 2) Corporate benchmarks 3) Chart 2.25 US. Consumer expectations. The Conference Board. Seasonally adjusted. 1985 =100. January 1990 – May 2008 140 140 120 120 100 100 80 80 60 60 40 1990 40 1994 1998 2002 2006 Source: Thomson Reuters Chart 2.26 GDP in industrial countries. 4-quarter change. Per cent. 2000 Q1 – 2008 Q1 5 5 4 4 3 3 2 2 1 1 0 0 -1 Euro area Japan US UK -1 -2 -2 2000 2002 2004 2006 2008 Sources: Thomson Reuters and Norges Bank Chart 2.27 GDP and the PMI (seasonally adjusted) for the euro area. July 1998 – May 2008 5 70 GDP, left-hand scale 1) 4 PMI, right-hand scale 2) 60 3 2 50 1 0 1998 1) 2) 40 2000 2002 2004 2006 Per cent growth last 12 months. Based on quarterly figures. Diffusion index. Sources: Thomson Reuters and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 2008 Output growth was solid in the euro area in Q1 (see Chart 2.26), especially in Germany, but there is growing evidence of slower growth ahead. Sluggish retail trade developments in Q1 continued in April, and surveys among business leaders on production and new orders (PMI) indicate weaker growth in Q2 (see Chart 2.27). The appreciation of the euro coupled with lower growth in the US and the UK will drag down export growth. Consumption will be reduced by high inflation, slower employment growth and somewhat tighter credit conditions. Housing investment is expected to fall, especially in Spain and Ireland. In the UK, growth is being dragged down by a significantly weaker housing market and tighter credit conditions, only partially offset by the stimulus to exports from a weaker sterling. Growth in Sweden slowed in Q1, and slower growth in other countries is expected to put a damper on the upturn in Sweden this year and next. Growth remains high in the BRIC countries and other EMEs. Revised figures show that China’s output increased more in 2006 and 2007 than previously estimated, but export growth has slowed over the past year, and four-quarter GDP growth fell to 10.6% in 2008 Q1 (see Chart 2.28). The global economic downturn and a strong increase in wages and other costs are expected to curb exports ahead. Continued strong growth in consumption and lower saving in China will be important on a more permanent basis in reducing global imbalances. In India, Russia and Brazil, industrial activity indicators point to further robust growth in Q2 (see Chart 2.29). The effects of higher food and commodity prices vary across EMEs and developing countries. Terms of trade have improved in some countries, but the dominant effect in several Asian countries may be that high inflation erodes household real income, pushes up corporate costs and limits economic policy leeway. The projections for growth among Norway’s trading partners have been revised up by ¼ percentage point for 2008 due to higher-than-expected growth in Q1. The effects of the financial turmoil and the downturn in the US are now expected to last longer into 2009, and our projection for growth next year has been revised down by ¼ percentage point. We now expect output growth among 33 our trading partners to fall from 3.3% in 2007 to 2¼% in 2008 and to 2% in 2009 (see Table 2.2). In the event, capacity utilisation will decrease markedly over the next couple of years, but the expected downshift in growth is still moderate relative to previous periods of weak growth since the early 1980s. It is uncertain how the turmoil in financial markets will evolve and how it will affect banks’ lending growth. The effects of the financial crisis on the real economy may be smaller than currently envisaged if the situation in financial markets normalises more quickly than expected. High commodity prices may imply that growth in EMEs can be more resilient than expected. On the other hand, sharp rises in food and energy prices may reduce consumption and investment more than expected. Both higher inflation itself and increased uncertainty about future inflation may make households and enterprises more cautious, leading to lower demand growth in many countries. Should the turmoil in financial markets flare up again, the downturn may be deeper and occur more quickly than expected. Chart 2.28 GDP in BRIC-countries1). 4-quarter growth. Per cent. 2000 Q1– 2008 Q1 15 12 India 2) Brazil Russia China 15 12 9 9 6 6 3 3 0 0 -3 2000 1) 2) -3 2002 2004 2006 2008 Brazil, Russia, India and China. Factor costs. Source: Thomson Reuters Chart 2.29 Business confidence indicator industry for Brazil and PMI manufacturing (seasonally adjusted) for Russia, India and China. January 2004 – June 2008 70 70 65 Brazil 1) China India Russia 65 60 60 55 55 50 50 45 2004 1) 45 2005 2006 2007 2008 Based on quarterly figures. Sources: Thomson Reuters and Norges Bank Table 2.2 Projections of GDP growth in other countries. Change from previous year. Per cent 2008 US 1¼ 1¼ 2¾ Euro area 1¾ 1¼ 2 Japan 1½ 1½ 1½ UK 1½ 1½ 2½ 2 2 2½ 10 9 9 2¼ 2 2½ Sweden China Trading partners2) 1) Average annual growth. 2) Export weights, 26 trading partners. Source: Norges Bank 34 2009 2010-20111) Chart 3.1 CPI, CPI-ATE1) and CPIXE2). 12-month change. Per cent. January 2004 – December 20083) 7.5 7.5 CPI CPI-ATE CPIXE 5.0 5.0 2.5 2.5 0.0 0.0 3 Economic developments High inflation -2.5 2004 -2.5 2005 2006 2007 2008 1) CPI adjusted for tax changes and excluding energy products. CPI adjusted for tax changes and excluding temporary fluctuations in energy prices. 3) Projections for June 2008 – December 2008. 2) Sources: Statistics Norway and Norges Bank Chart 3.2 CPI-ATE1). Total and by supplier sector2) . 12-month change. Per cent. January 2004 – December 20083) 6 6 Domestically produced goods and services Imported consumer goods CPI-ATE 3 3 0 0 -3 -3 -6 2004 1) 2) 3) -6 2005 2006 2007 2008 CPI adjusted for tax changes and excluding energy products. Norges Bank’s estimates. Projections for June 2008 – December 2008. Sources: Statistics Norway and Norges Bank Chart 3.3 Unit labour costs, mainland Norway. 4-quarter change. 4-quarter moving average. 1997 Q1 – 2008 Q1 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 The rise in the consumer price index (CPI) has been above 3% so far this year after rising rapidly towards the end of last year (see Chart 3.1). Electricity prices have been considerably higher than in the first half of 2007 and the increase in oil prices has pushed up petrol prices in recent months. Energy prices have risen faster than prices for other goods and services in the CPI for a number of years. CPIXE, which captures trend changes in energy prices (see box on page 54) has thus risen faster than the CPI-ATE (see Chart 3.1). Various measures of underlying inflation range between 2.3% and 3.3%. On the whole underlying inflation is now estimated to be close to, but somewhat higher than 2½%. Underlying inflation was moderate for a long time during this cyclical upturn, but has picked up markedly since 2006, primarily reflecting the rise in prices for domestically produced goods and services (see Chart 3.2). In May, prices for domestically produced goods and services were 3.5% higher than in the same month one year earlier. Recent price developments are discussed further in a box on page 38. Unit labour costs have risen substantially in recent years (see Chart 3.3). Wage growth has quickened and productivity growth has slowed as usual towards the end of a cyclical upturn. Higher cost inflation has led to a higher rise in prices for both goods and services. Strong demand growth may have made it easier for firms to pass on higher costs to customers. Wage growth will be higher in 2008 than in 2007 and productivity growth is expected to continue to drift down. The rise in oil prices is associated with higher transport costs, which may push up the rise in prices for domestically produced goods and services. -1 -1 1997 1999 2001 2003 2005 2007 Sources: Statistics Norway and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 Domestically produced goods and services can be divided into three sub-groups; domestically produced consumer 35 goods, services and rents for dwellings. Since 2006, the rise in prices for domestically produced consumer goods has shown the strongest increase (see Chart 3.4). According to a Norges Bank survey of Norwegian firms’ price-setting behaviour, higher prices among sub-contractors are the main factor behind price increases in retail trade (see Chart 3.5).1 Rapidly rising costs at all stages of the production chain are now feeding through to retail prices. Food price inflation has exhibited a sharp rise. While food and nonalcoholic beverages prices (tax-adjusted) fell in 2006, prices for these goods were 4.6% higher in May 2008 than the same month in 2007. World food prices have soared, but in Norway it is primarily the rise in prices for domestically produced food that has jumped up (see box on recent price developments). Last year’s agricultural settlement resulted in a noticeably higher rise in prices for farm products than in previous years. This year’s settlement may result in an overall increase in these prices that is almost three times as high as last year (see Chart 3.6). The negotiated prices, which become effective from 1 July 2008 and 1 January 2009, will probably result in an even higher rise in prices for domestically produced food. The rise in rents has accelerated since last autumn, but compared with developments since the early 1990s the rise in rents remains fairly moderate. Looking ahead, expectations of a slower rise in house prices may make it more attractive to rent. High immigration is also pushing up demand in the rental market. Overall, house rent inflation is expected to edge up ahead. According to TNS Gallup’s second-quarter expectations survey, the share of business leaders who expect a higher rise in firms’ selling prices the next twelve month is clearly higher than the share expecting a slower rise in prices (see Chart 3.7). Expectations of a faster rise in prices may result in higher percentage mark-ups when firms change their prices. Among our regional network contacts in retail trade and household services, the share expecting a higher rise in prices is about the same as the share expecting a lower rise in prices. On the whole, the rise in prices for domestically produced goods and services is expected to edge higher through the 1 Some preliminary results from the survey conducted in the first half of 2007 were discussed in a box in MPR 2/07. The survey will be presented in Economic Bulletin 2/08 to be published in October. 36 Chart 3.4 Domestically produced consumer goods and services by CPI sectors. 1), 2) 12-month change. Per cent. January 2004 – May 2008 House rent Services 5 5 Domestically produced goods 3 3 1 1 -1 -1 2004 1) 2) 2005 2006 2007 2008 Adjusted for tax changes and excluding energy products. Norges Bank’s estimates. Sources: Statistics Norway and Norges Bank Chart 3.5 Reasons for price changes. Survey results1). Averages on a scale from 1 to 4 (1 = not important, 4 = very important) 4 4 Rise in labour costs Rise in supplier prices 3 3 2 2 1 1 Commodity trade Total economy 1) The survey was conducted by Norges Bank in the first half of 2007. Randomly selected Norwegian businesses participated. Preliminary results from the survey was published in a box in MPR 2/07. A more detailed analysis of the whole survey will be published in October in Economic Bulletin 2/08. Source: Norges Bank Chart 3.6 Changes in farmers’ target prices as set in the yearly agricultural agreements. Millions of NOK. Nominal prices. 1999 - 2008 2000 2000 1500 1500 1000 1000 500 500 0 0 -500 -500 -1000 1999 -1000 2001 2003 2005 Source: Ministry of Agriculture and Food 2007 Chart 3.7 Expected growth in firms’ selling prices over the next 12 months. TNS Gallup and Norges Bank’s regional network. Diffusion indices1). January 2005 – June 2008 70 70 Retail and service businesses (towards households) All businesses (TNS Gallup) 60 60 50 50 40 40 2006 2007 2008 1) Share expecting higher growth +0,5 *share expecting the same growth. Numbers over 50 indicate expectations of higher growth. Source: TNS Gallup and Norges Bank’s regional network Chart 3.8 Indicator of external price impulses to imported consumer goods measured in foreign currency. Annual change. Per cent. 1995 – 20111) 2 2 1 1 0 0 -1 -1 -2 -2 -3 1997 1) -3 2000 2003 2006 2009 Projections for 2008 – 2011. Sources: Thomson Reuters, Statistics Norway and Norges Bank Chart 3.9 Import-weighted exchange rate (I-44). Actual figures and projections. Index. 2004 Q1 – 2008 Q4 100 100 95 95 90 90 85 2004 85 2005 2006 2007 2008 1) A rising curve denotes a weaker krone exchange rate. The exchange rate path is based on uncovered interest rate parity. Source: Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 year. At year-end, the rise in prices for domestically produced goods and services may be close to 4%. As a result of moderating growth in output and employment, the rise in prices for domestically produced goods and services will level off and gradually ease. Against the background of continued high wage growth, the rise in prices for domestically produced goods and services may nevertheless be close to 3½% in the years ahead. In Norway, prices for imported consumer goods are still falling, albeit at a somewhat slower pace than in 2007 (see Chart 3.2). In May, prices for imported consumer goods were 0.2% lower than in May 2007. Measured in foreign currency, prices for imported consumer goods have generally fallen since the end of the 1990s (see Chart 3.8). This reflects low global inflation and a growing share of imports from low-cost countries. In recent years, the shift towards imports from low-cost countries has become less pronounced. Moreover, global inflation has increased. In 2007, prices for imported consumer goods were approximately unchanged on the previous year measured in foreign currency. The gradual appreciation of the krone since 2004 (see Chart 3.9) has nevertheless contributed to a sustained fall in retail prices for imported consumer goods. This year and in the years ahead, prices for imported consumer goods are expected to increase measured in foreign currency (see Chart 3.8). The shift towards imports from low-cost countries is expected to ease further, and we also expect high global inflation partly as a result of high wage growth in China and other low-cost countries. Because the krone normally influences prices for imported consumer goods with a lag, the recent krone appreciation implies a lower rise in prices for imported consumer goods through 2008. High domestic cost inflation may partly counteract the effect of the krone appreciation on retail prices. The effects of the krone appreciation will gradually unwind, and the krone is assumed to depreciate somewhat through the projection period. Towards the end of the period, retail prices for imported consumer goods will probably rise. With a continued quickening of the rate of increase in prices for domestically produced goods and services, CPIATE inflation may hover around 2.5% over the next few 37 Recent price developments The 12-month rise in the consumer price index (CPI) has been above 3% so far this year. In May, the year-on-year rise was 3.1%. Inflation has been somewhat higher in recent months than projected in the previous Report (see Chart 1), reflecting somewhat higher inflation adjusted for tax changes and excluding energy products (CPIATE) than projected (see Chart 1). Prices for fuel and lubricants have also climbed further than anticipated. In May, the year-on-year rise in these prices was 10%. Electricity prices rose by 14% in the year to May 2008, as expected. Chart 2). In May, the year-on-year rise was 3.5%. This is due partly to a further rise in food prices, which have risen by 4.1% since January alone. Prices for domestically produced food have accelerated in particular (see Chart 3). House rent inflation has also picked up markedly. In May, the year-onyear rise was 2.9%, up from 1.9% in February. The rise in rents from 2006 to 2007 was 1.6%, the lowest annual increase since 1995. Actual and imputed rents are the most important sub-groups of the rent component of the CPI.1 Actual rents measure price movements for households that rent dwellings, whereas imputed rents are a measure of housing costs for those who own their own homes. Historically, actual and imputed rents have risen largely in tandem, but since the rent index was restructured in July 2006, imputed rents have increased somewhat less than actual rents (see Chart 4). The rise in both actual and imputed rents has quickened recently. The 12-month rise in the CPIATE was 2.3% in May, down from 2.4% in April. Other indicators of underlying inflation show a higher increase. The year-on-year rise in a trimmed mean of the sub-groups in the CPI was 3.3% in May, while the weighted median showed a rise of 3.0%. The weighted median in particular has increased since the previous Report (see Chart 1.1 in Section 1). Inflation adjusted for tax changes and excluding temporary changes in energy prices (CPIXE) The rise in prices for products was 3.0% in May. for the maintenance and repair of dwellings has slowed markedly Sharper rise in prices for (see Chart 4). In some months last year, the 12-month rise in these domestically produced goods prices was more than 8%. In May and services The rise in prices for domestically this year, the year-on-year rise was produced goods and services has 3.1%, reflecting reduced activity in continued to quicken and has been the construction sector. According slightly stronger than expected (see to Statistics Norway, air fares were 38 16% lower in May than in May last year (see Chart 5). It is unlikely that the drop in air fares will continue, as the high price of oil is pushing up airlines’ fuel costs. The air fare index in the CPI was restructured in August last year and will probably now also capture the tendency for prices to be higher during the holiday months than otherwise. The index for books was restructured at the same time. As with the air fare index, month-to-month variations in the book index have been considerably wider since the restructuring. Book prices fell sharply in March as a result of the annual clearance sales, but rose again thereafter (see Chart 5). Continued fall in prices for imported consumer goods The drop in prices for imported consumer goods has continued. In May, they were 0.2% lower than in May last year, i.e. in line with that projected (see Chart 2). Prices for imported consumer goods are still being pulled down by falling prices for audiovisual equipment, white goods and clothing and footwear (see Chart 6). 1 The rent component, which makes up a fifth of the CPI-ATE, also includes municipal charges and home insurance. Chart 1 CPI and CPI-ATE1) . Projections from MPR 1/08 (broken line) and actual. 12-month change. Per cent. January 2004 – May 2008 4 4 CPI 3 CPI-ATE 3 2 2 1 1 0 0 -1 -1 CPI-ATE 4 4 Domestically produced goods and services Imported consumer goods 2 2 0 0 -2 -2 -2 -2 2004 1) Chart 2 CPI-ATE1). Total and by supplier sector2). Projections from MPR 1/08 (broken line) and actual. 12-month change. Per cent. January 2004 – May 2008 2005 2006 2007 -4 -4 2004 2008 CPI adjusted for tax changes and excluding energy products. 1) Sources: Statistics Norway and Norges Bank 2) 2005 2006 2007 2008 CPI adjusted for tax changes and excluding energy products. Norges Bank’s estimates. Sources: Statistics Norway and Norges Bank Chart 3 Developments in food prices in Norway. 12-month change. Per cent. January 2005 – May 2008 8 Chart 4 Selected product groups in the CPI. 12-month change. Per cent. January 2004 – May 2008 8 10 Produced in Norway using Norwegian and imported inputs Imported products and miscellaneous 6 6 8 4 2 2 0 0 -2 -2 2006 2007 Actual rent 8 Products for maintenance and repair of dwellings 4 2005 10 Imputed rent Produced in Norway with Norwegian inputs 2008 Sources: Norwegian Agricultural Economic Research Institute and Norges Bank 6 6 4 4 2 2 0 2004 0 2005 2006 2007 2008 Source: Statistics Norway Chart 6 Prices for product groups in the CPI that are mainly imported. 12-month change. Per cent. January 2004 – May 2008 Chart 5 Price level for product groups in the CPI that were restructured from August 2007. Indices, 1998 = 100. January 2004 – May 2008 5 5 170 170 Books Air fares 2.5 Cars White goods Clothing and footwear Audiovisual equipment 0 0 150 150 -2.5 -2.5 130 130 90 2005 2006 2007 2008 Source: Statistics Norway NORGES BANK -5 -5 -7.5 -7.5 -10 -10 110 110 90 2004 2.5 MONETARY POLICY REPORT 2/2008 -12.5 2004 -12.5 2005 2006 2007 2008 Source: Statistics Norway 39 months. The rise in prices for imported consumer goods towards year-end is expected to be somewhat lower owing to the strong krone. This will have a dampening impact on inflation. Norges Bank uses different empirical models in the work on short-term projections for consumer prices. Projections derived from these models are combined with other types of information in an overall assessment of inflation the next quarters. We have developed a system for averaging projections from short-term models – SAM – as an aid in making projections for inflation and output over the next quarters (see box on page 56). The projections from SAM show slightly higher inflation at the end of the year than we project (see Chart 3.10). A weighted average of the forecasts from empirical models for the two groups domestically produced goods and services and imported consumer goods yields somewhat lower inflation than our projection. The different projections from the various models illustrate that there is also considerable uncertainty surrounding the projections for short-term price developments. There are prospects that electricity prices ahead will be higher than projected in the previous Report (see Chart 3.11). This is because the surge in oil prices has pushed up forward electricity prices in Europe, which in turn has led to higher price expectations in Norway. The rise in oil prices has also driven up petrol prices in Norway. If petrol prices remain at approximately the current level and electricity prices move in line with market expectations, the year-onyear rise in consumer prices may be very high in the next months (see Chart 3.1).2 This primarily reflects unusually low electricity prices through summer and the first autumn months last year. The overall annual rise in consumer prices may be about 4% from 2007 to 2008. The prospects for higher energy prices result in a higher rise in the estimated energy price trend included in the CPIXE (see Chart 3.12). CPIXE inflation will be higher than CPI-ATE inflation, and somewhat higher than the inflation target of 2.5% over the next years. From 2010, energy Chart 3.10 CPIXE1) and CPI-ATE2). Actual figures and projections by different models. 4-quarter change. Per cent. 2006 Q1 – 2008 Q4 4 4 Empirical single-equation models SAM CPI-ATE CPIXE 3 2 2 1 1 0 2006 the southern part of Norway and the rest of the country, and the price differences are likely to persist through summer. It is unclear how this will affect estimated price developments for electricity in the consumer price index. We assume that prices for Norway as a whole in the coming months will be somewhat under the expected average price for the Nordic countries, the so-called system price on the power exchange Nord Pool. 40 0 2007 2008 1) CPI adjusted for tax changes and excluding temporary fluctuations in energy prices. CPI adjusted for tax changes and excluding energy products. 2) Sources: Statistics Norway and Norges Bank Chart 3.11 Electricity prices. Nord Pool. NOK/MWh. Actual prices. January 2004 – May 2008. Futures prices (broken line) from 2008 Q3 – 2010 Q4 600 600 400 400 200 200 20-Jun-08 10-Mar-08 0 2004 0 2006 2008 2010 Sources: Nord Pool and Norges Bank Chart 3.12 Energy component of the CPI.1) Actual and calculated trend.2) 12-month change. Per cent. January 2004 – December 20113) 50 50 Estimated trend Energy prices in CPI 30 30 10 10 -10 -10 -30 2004 2 In recent months, there have been considerable electricity price differences between 3 -30 2006 2008 2010 1) Including electricity and fuel products. The trend is calculated by a HP-filter (lamda = 14400) on the actual and projected movements of energy prices in the CPI. 3) Projections for June 2008 – December 2011. 2) Sources: Nord Pool, Statistics Norway and Norges Bank Chart 3.13 Mainland GDP. Annual growth in volume. Per cent. 1971 – 20111) 6 6 4 4 2 2 0 0 prices are projected to rise at about the same rate as other prices. The rate of increase in the CPI-ATE, CPIXE and CPI will converge and settle around the inflation target of 2.5% towards the end of the projection period. Moderating GDP growth -2 -2 1970 1) 1980 1990 2000 2010 Projections for 2008 – 2011. Sources: Statistics Norway and Norges Bank Chart 3.14 Change in employment (QNA) on previous year (per cent) and unemployment (LFS) as a percentage of the labour force. 1980 – 20111) 8 4 2 6 0 4 2 -2 Employed LFS-unemployment 0 -4 1980 1) Strong growth in the Norwegian economy over four years has boosted activity growth to a high level. According to the national accounts, mainland GDP growth was 6.2% in 2007, compared with growth of just below 5% in 2006 (see Chart 3.13). Growth has been broad-based, but primarily driven by rapid growth in private consumption, housing investment and production equipment. In the first phase of the upturn productivity was strong. Later in the upswing large inflows of foreign labour and higher participation rates among the existing population made it possible to sustain high growth rates (see Chart 3.14). 1984 1988 1992 1996 2000 2004 2008 Projections for 2008 – 2011. Sources: Statistics Norway and Norges Bank Chart 3.15 Building starts. Utility floor space for dwellings and other buildings. Moving three month growth rates. Seasonally adjusted. Per cent. January 2006 – April 2008 30 30 Buildings other than dwellings Dwellings 20 20 10 10 0 0 -10 -10 -20 -20 2006 2007 2008 Source: Statistics Norway NORGES BANK MONETARY POLICY REPORT 2/2008 There are now signs that growth is moderating. According to preliminary quarterly national accounts figures, mainland GDP at basic prices and excluding electricity production grew by a seasonally adjusted 0.7% from 2007 Q4 to 2008 Q1. At market prices, growth was 0.3%. The difference partly reflects lower consumption of highly-taxed goods such as electricity and cars, which reduced government VAT revenues and special tax revenues. At market prices and including electricity production, mainland GDP expanded by 0.2%. Previously published quarterly national accounts figures are prone to extensive revision as more information becomes available. The Q1 figures must therefore be considered particularly uncertain. The main drag on growth in the first quarter was sluggish household demand. On the other hand, petroleum investment remains buoyant. Combined with high oil prices, this is generating strong demand in the petroleum sector. The slowdown is most visible in the construction sector. According to building statistics, building starts in square metres were lower in the first four months of 2008 than in the same period in 2007. Reduced activity primarily reflects low housing starts. Following very high building starts towards the end of 2007, commercial and holiday home 41 starts have declined (see Chart 3.15), but the figures for commercial building starts so far this year are still higher than at the same time last year. Forward-looking indicators show clear signs that growth in economic activity will moderate over the next quarters. New manufacturing orders fell by nearly 20% from 2007 Q1 to 2008 Q1. Order backlogs remain at a high level, but a lower level of new orders will have a noticeable impact on order backlogs over the next two to three quarters. Chart 3.16 Business tendency survey and Purchasing Managers Index (PMI). Seasonally adjusted diffusion index. Quarterly and monthly figures. 2004 Q1 – 2008 Q1 (May 2008) 66 20 62 16 58 12 54 8 PMI, left-hand scale Business Tendency Survey, right-hand scale The overall indicator for manufacturing leaders’ expectations in the business tendency survey was unchanged from 2007 Q4 to 2008 Q1. According to this indicator, expectations are now somewhat lower than the average for the past ten years. The Norwegian PMI index3 has in the past year been a leading indicator of developments in the business tendency survey (see Chart 3.16). The PMI index has levelled off at just above 50 thus far in 2008. This indicates that purchasing managers now expect low, but positive growth. The business tendency survey shows that manufacturing leaders’ expectations concerning growth in the next quarter have recently been higher than actual growth (see Chart 3.17). The widening gap between expected an actual output is also evident in comparable surveys in the regional network (see Chart 3.18). However, the regional network reports that growth expectations have now been lowered considerably compared with last year. The network expects growth of 2%-3% in 2008. Since the previous Report, lending rates have increased. According to Norges Bank’s bank lending survey4, banks are gradually tightening lending standards for both business customers and households. In the construction sector, where access to bank loans has been important, activity fell in the first quarter of 2008 compared with the same period in 2007. Higher interest rates are pushing up the household saving ratio, which is now at a historically low level. In addition, higher inflation is restraining growth in real disposable income. Growth in private consumption is slackening. 50 2004 4 2005 2006 2007 2008 Sources: Statistics Norway and NIMA/Fokus Bank Chart 3.17 Business tendency survey. Actual production and production as expected last quarter. Seasonally adjusted diffusion index. 2004 Q1 – 2008 Q2 70 70 Actual production Expected production 65 65 60 60 55 55 50 50 45 45 40 2004 40 2005 2006 2007 2008 Source: Statistics Norway Chart 3.18 Actual production and production as expected last quarter. Index1). November 2004 – May 2008 4 4 3 3 2 2 1 1 Actual production Expected production 0 0 -1 -1 -2 Nov-04 -2 Nov-05 Nov-06 1) Nov-07 3 The PMI is a monthly survey of activity changes among purchasing managers. In The scale runs from -5 to +5, where -5 indicates a large fall and +5 indicates a strong rise. See article "Norges Bank's regional network" in Economic Bulletin 3/05 for further detail. Norway, the PMI index is compiled by NIMA (Norwegian Association of Purchasing and Source: Norges Bank’s regional network Logistics). 4 See Financial Stability 1/08. 42 Chart 3.19 Share of total turnover related to the oil-producing sector. Per cent. 2008 15 15 10 10 5 5 0 0 Total Building and Manufacturing construction Services Retail Source: Norges Bank’s regional network Chart 3.20 Mainland GDP in terms of market value.1) Fourquarter change. Seasonally adjusted. Per cent. 2006 Q1 – 2008 Q4 10 10 SAM MPR 2/08 Mainland GDP 8 8 6 6 4 4 2 2 0 0 2006 1) As noted in Section 2, growth in the world economy is expected to be lower towards the end of 2008 and into 2009. This may reduce demand for Norwegian exports. High domestic cost inflation and an appreciation of the nominal krone exchange rate have resulted in a strong real exchange rate. This may also drag down export growth. 2007 2008 Projections for 2008 Q2- 2008 Q4. Sources: Statistics Norway and Norges Bank Chart 3.21 Labour force as percentage of population in same age group. Seasonally adjusted. 1997 Q1 – 2008 Q1 90 90 85 85 80 80 15-25 years 75 70 75 55-66 years 25-54 years 70 65 65 60 60 55 55 50 1997 50 1999 2001 2003 2005 2007 On the other hand, sustained growth in employment and high wage growth will underpin income growth. On the Oslo Stock Exchange, equity prices have shown strong gains after the sharp declines at the beginning of the year. House prices seem to be stabilising. Based on the Revised National Budget, our projection for growth in general government consumption and investment in 2008 has been revised up. About 32% of the enterprises in the regional network report that they are feeling the effects of demand in the petroleum sector, and almost 15% of turnover in manufacturing is related to this sector (see Chart 3.19).5 Moreover, 36% of the enterprises are noticing the effects of competition for labour with the petroleum sector. Many petroleum supplier industries have faced capacity problems in recent years. Improved resource availability and weaker demand in other sectors of the economy may increase growth conditions in these industries. High oil prices are stimulating activity in the petroleum sector and in petroleum supplier industries. The surge in oil prices may also fuel expectations of sustained growth in household income and solid public finances. On balance, mainland GDP growth is projected to show a clear downward shift in 2008. Mainland GDP growth is projected at 3¼% in 2008. Our projections are consistent with the system for averaging short-term models (SAM) in the second quarter, but are somewhat lower in the latter half of 2008 (see Chart 3.20 and box on page 56). A higher interest rate level, a strong krone and lower external growth will reduce capacity utilisation. Growth in private consumption is softening and housing starts are on the decline. Towards year-end employment growth is also expected to slacken. Sources: Statistics Norway and Norges Bank 5 The survey findings are discussed further in Economic Commentaries 2/08 “Effects of high oil prices on the Norwegian economy”, www.norges-bank.no, 26 June 2008. NORGES BANK MONETARY POLICY REPORT 2/2008 43 Continued strong growth in labour supply Chart 3.22 Work permits issued by the Norwegian Directorate of Immigration (UDI) , total and to citizens from new EEA countries. In thousands. January 2004 – May 2008 The labour force expanded by 4% between 2007 Q1 and 2008 Q1, which is the strongest growth in the labour supply recorded since 1976. Both labour force participation and population growth increased. Population growth is being driven by historically high net inward migration. 100 In the year to 2008 Q1, population growth accounted for about half of labour supply growth. Some of the growth in the labour supply measured by the LFS reflects an increase in the number of work permits issued by the Norwegian Directorate of Immigration that are valid for more than six months. This means that a larger share of inward labour migration is registered as resident in Norway and hence included in the basis for the LFS. However, population growth is not the only factor explaining the growth in the labour force. In the past year, there has been a considerable increase in the supply of labour from younger age groups (see Chart 3.21). At the same time, the number of benefit recipients and pensioners has shown a smaller increase than implied by changes in the composition of the population. In 2007, participation rates were the highest ever registered. The number of work permits has continued to rise so far this year (see Chart 3.22). In addition to continued high inward labour migration from Poland and the Baltic countries, labour flows from Romania are now also rising (see Chart 3.23). The regional network has for the third time conducted a survey on the use of foreign labour. The survey shows that the use of foreign labour is still rising in all industries. Most enterprises report that they employ foreign labour because of a shortage of Norwegian labour, but an increasing number of companies are recruiting foreign labour because they are most qualified for the job (see Chart 3.24). Only 3% of the enterprises report that they are replacing Norwegian labour with foreign labour in order to cut costs. In the past year, the increase in the use of foreign labour has been highest in the public sector and retail trade. 100 Work permits (total) Work permits (new EEA countries) 80 80 60 60 40 40 20 20 0 2004 0 2005 2006 2007 2008 Source: Norwegian Directorate of Immigration (UDI) Chart 3.23 Registered employees from new EU countries. In thousands. 2004 – 2008 40 40 Romania Bulgaria 30 Latvia 30 Lithuania Estonia 20 20 Poland 10 10 0 0 2004 2005 2006 2007 2008 Source: Central Office – Foreign Tax Affairs Chart 3.24 Reasons for use of foreign labour. Per cent. 2006 - 2008 125 100 Shortage of Norwegian labour Cut costs Other 125 Season Qualifications 100 75 75 50 50 25 25 0 New population projections from Statistics Norway show an upward revision of population growth estimates. The 44 0 2006 2007 Source: Norges Bank’s regional network 2008 Table 3.1 Population and labour force growth. Change from previous year. Per cent 2008 2009 2010 2011 Population growth in the age group 15-74 years 1¾ 1½ 1¼ 1¼ Contribution from change in population composition -¼ -¼ -¼ -¼ Cyclical contribution 1¼ -¼ -½ -½ Labour force growth 2¾ 1 ½ ½ Source: Norges Bank Figur 3.25 Hourly productivity, mainland Norway. Five-quarter moving average. Per cent. Four-quarter change. 1997 Q1 – 2008 Q1 5 5 4 4 3 3 2 2 Average 1997 Q1 – 2008 Q1 1 1 0 1997 0 1999 2001 2003 2005 2007 Sources: Statistics Norway and Norges Bank Chart 3.26 Estimates for the output gap. Per cent. 1983 - 2011 5 5 3 3 1 1 -1 -1 -3 -3 -5 1983 -5 1988 1993 1998 2003 2008 projections are based on continued high net immigration from EU/EEA countries. Our projections for population growth have been revised up through the projection period, but we project a somewhat faster moderation in labour immigration than Statistics Norway. Some of the labour immigration in recent years probably reflects cyclical conditions. The number of immigrants is likely to decline as growth in labour demand in the Norwegian business sector recedes. Based on the experience of other countries and earlier periods of high immigration, a reversal of the migration flow is not likely to occur rapidly. Population growth for the group aged 15-74 is now estimated at 1¾% in 2008, followed by slower rates in subsequent years. A higher share of older age groups with low participation rates will also curb labour supply growth. Moreover, reduced labour market tightness will probably bring down participation rates for some groups (see Table 3.1). As part of the negotiated result between the Norwegian Confederation of Trade Unions/Confederation of Vocational Unions and the Confederation of Norwegian Enterprise, an agreement was reached to extend the contractual early retirement scheme. In the longer term, the contractual early retirement scheme may influence the labour supply, but with opposing effects. The agreement will provide improved opportunities to combine work and pension, which in isolation may increase the labour supply. On the other hand, it will also increase income for some groups of pensioners, which may reduce the labour supply. Capacity utilisation normalises Strong growth in productivity and the labour supply has resulted in high growth potential in the Norwegian economy. With continued high labour immigration, potential growth will be high again this year. Lower immigration ahead will result in a gradual decline in potential growth further out in the projection period. The output gap expresses our assessment of capacity utilisation in the economy relative to underlying potential output. Following several years of brisk activity growth and rising capacity utilisation, the output gap probably Source: Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 45 peaked towards the end of 2007.6 The end of a cyclical upturn is often characterised by low productivity growth. This has also been the case this time (see Chart 3.25). It takes some time before enterprises adapt the use of labour to lower productivity growth. Hourly productivity growth is expected to be very low this year, but it is assumed that productivity growth will pick up again as enterprises adapt employment to production. Compared with 2007, growth slowed markedly in 2008 Q1. Growth in the economy this year is projected to be lower than potential growth, with the output gap moving down from the current high level (see Chart 3.26). The regional network and business tendency survey indicate that capacity utilisation peaked at the end of 2007 (see Chart 3.27). Fall in unemployment has come to a halt During this cyclical upturn unemployment fell to a very low level (see Chart 3.28). Registered unemployment is now at its lowest level in over 20 years and has remained approximately unchanged since the beginning of 2008. In May, the number of registered unemployed stood at 1.5% of the labour force. At the same time, persons participating in labour market programmes came to 0.5%. According to the LFS, the unemployment rate was 2.4% in March, which is somewhat lower than at the end of the cyclical expansion in 1998. The number of vacancies has edged down, but from a high level. Demand for labour in some labour market segments is still elevated, e.g. education, health and engineers, particularly in southwest Norway. For other occupational groups such as the construction workers, demand has softened since last spring. This is confirmed by the regional network (see Chart 3.29). Overall, our regional network contacts expect sustained employment growth, but at a lower rate than earlier. The same picture Chart 3.27 Capacity utilisation in manufacturing. Business tendency survey. Per cent. 2000 Q1 – 2008 Q1 92 92 Intermediate goods 88 88 Consumer goods Capital goods 84 84 80 80 76 76 72 2000 72 2002 2004 2006 Source: Statistics Norway Chart 3.28 Unemployed. Percentage of labour force. Seasonally adjusted. February 1983 – May 2008 10 Registered unemployment 8 6 Registered unemployed and on labour market programmes 4 2 2 0 1983 0 1988 1993 1998 among other things a higher supply of labour from Central Europe. 46 2008 Chart 3.29 Expected employment growth in the next three months. February 2004 – May 2008 4 Building and construction Services Public sector 3 3 2 2 1 1 0 0 -1 Source: Norges Bank’s regional network our assessment at that time. In recent years growth partly reflects structural changes, 2003 Sources: Statistics Norway, Norwegian Labour and Welfare Administration (NAV) and Norges Bank potential where the estimate of the potential at a given time depends on GDP growth before the upturn. The technically estimated potential for 2002-2003 is higher than 6 4 -1 Jan-04 potential in recent years also increases the estimate of the potential in the years just 10 8 LFS unemployment 6 Historically, the output gap is based on a technical trend calculation of the output before and afterwards. Under this method, high growth in mainland GDP and in the 2008 Jan-05 Jan-06 Jan-07 Jan-08 Chart 3.30 Total mainland labour costs as a share of mainland GDP. Per cent. 1970 – 20081) 65 65 60 60 55 55 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 1) GDP in basic value. Figures for 2008 are an average of 2007 Q2 – 2008 Q1. Sources: Statistics Norway and Norges Bank emerges in the semi-annual report of the Confederation of Norwegian Enterprise and other expectations surveys such as the Norwegian PMI index for May and the firstquarter business tendency survey. Looking ahead, lower growth in domestic activity will gradually be reflected in lower employment growth. Continued growth in some areas of the economy may contribute to supporting demand for labour in some sectors. Unemployment is expected to increase gradually in the latter half of the year. Unemployment is projected to exceed 3% in the course of 2009 and gradually approach 3¾% in 2011. High wage growth Chart 3.31 Growth in producer real wages and consumer real wages.1) Per cent. 1992 – 2007 6 6 Producer real wages Consumer real wages 4 4 2 2 0 0 -2 -2 1992 1995 1998 2001 2004 2007 1) In producer real wages nominal wages are deflated by the mainland GDP deflator. In consumer real wages we have used the deflator for private consumption in the national accounts. Sources: Statistics Norway, Technical Reporting Committee on Income Settlements and Norges Bank Chart 3.32 Annual wage growth1) and LFS unemployment. Per cent. 1993 – 2011 8 8 Annual wage growth Unemploymnet rate 6 6 4 4 2 2 0 0 1993 1996 1999 2002 2005 2008 2011 1) Average for all groups. Including estimated costs of increase in number of vacation days and introduction of mandatory occupational pensions. Sources: Statistics Norway, Technical Reporting Committee on Income Settlements and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 In the first phase of this cyclical upturn, wage shares declined and neared levels recorded in the 1970s (see Chart 3.30). Strong productivity growth and substantial terms-of-trade gains provided scope for high real wage growth in tandem with falling wage shares. The improvement in the terms of trade has resulted in a faster rise in consumers’ real wages than in producers’ real wages (see Chart 3.31). Increased cross-border flows of both labour and work assignments may have contributed to restraining nominal wage growth. Wage shares are now on the increase again. Rising oil prices are still a source of favourable terms-of-trade developments, but reduced productivity growth and relatively high wage growth this year will result in a further increase in wage shares. Wage growth has accelerated over the past three years in pace with a decline in unemployment and the emergence of bottlenecks in some labour market segments (see Chart 3.32). Competition with the petroleum sector may also have added to wage pressures. According to the regional network, 27% of Norwegian enterprises report wage pressures owing to competition for labour with this sector (see Chart 3.33). At the beginning of the recovery, wage growth was highest in the private sector. As was the case towards the end of the previous upturns, wage growth this year will probably be highest in the public sector. The outcome of the negotiations between the Norwegian Confederation 47 of Trade Unions, the Confederation of Vocational Unions and the Confederation of Norwegian Enterprise implies annual wage growth of 5.6%. Wage drift is estimated at 2½%, a quarter percentage point lower than last year, but higher than in all the years in the previous cyclical upturn. The results of the public sector negotiations imply wage growth of 6¼%. So far, it appears that overall wage growth will be fairly close to 6% this year. The estimate is still uncertain. The public sector wage negotiations are based on low wage drift. In the local government sector, pay increases have been agreed for 2009. With a high carry-over, the effect for 2009 may be estimated to about 4½%. Measured in common currency, wage differentials between Norway and its trading partners have never been greater. High productivity growth, strong demand growth and favourable export prices have contributed to solid corporate earnings in spite of the high wage level. With lower global demand, Norwegian export companies will face stronger competition and the high wage level may reduce corporate profitability. Wage growth is projected to taper off to a level just below 5% in 2011 as labour market conditions become more normal. Chart 3.33 How has demand for labour in the oil sector affected your business in the past year? Per cent. 2008 30 30 25 25 20 20 15 15 10 10 5 5 0 0 Wage growth Turnover Labour shortages Other Source: Norges Bank’s regional network Chart 3.34 Household real disposable income1) and consumption2). Annual growth. Per cent. 1997 – 20113) 8 Income 8 Consumption 6 6 4 4 2 2 0 0 Weaker growth in private consumption Private consumption grew by 6.4% in 2007, or at a rate not witnessed since the boom in 1985-1986. In the past year, the main driver behind growth in private consumption has been vigorous growth in household real disposable income (see Chart 3.34). Low inflation and strong employment growth have boosted total real income. At the same time, household saving has fallen since 2002 (see Chart 3.35).7 According to figures from household income accounts, household saving was negative in 2007. A number of factors point to considerably slower growth in private consumption from 2007 to 2008. For 2008 as a whole, consumption growth is projected at about 2¾%. According to the first-quarter national accounts for 2008, private consumption is growing at a slower pace. The retail trade index for April indicates a continued weak profile. Growth in household real disposable income will 7 Excluding share dividends and adjusted for tax-related adaptations to the introduction of dividend tax for personal shareholders in 2006. 48 1997 2000 2003 2006 2009 1) Adjusted for estimated reinvested share dividends for 2000 – 2005 and redemption/reduction of equity capital for 2006 – 2011. Includes consumption in non-profit organisations. 3) Projections for 2008 – 2011. 2) Sources: Statistics Norway and Norges Bank Chart 3.35 Household saving and net lending as a share of disposable income. Per cent. 1983 – 20111) 15 15 Saving ratio excl. share dividends Net lending ratio excl. share dividends 10 10 Saving ratio 2) 5 5 0 0 -5 -5 -10 -10 -15 -15 1983 1988 1993 1998 2003 1) 2008 Projections for 2008 – 2011. Adjusted for estimated reinvested share dividends for 2000 – 2005 and redemption/reduction of equity capital for 2006 – 2011. 2) Sources: Statistics Norway and Norges Bank Chart 3.36 Consumer confidence. Diffusion indices. Quarterly and monthly figures. 2004 Q1– 2008 Q2 (May 2008) 33 20 30 15 27 10 probably be lower this year than in previous years. Even though nominal wage growth is still high, lower employment growth and higher inflation will hold back growth in real income. Household borrowing costs have increased over the past year (see Section 2). 24 5 21 TNS Gallup (trend, left-hand scale) 18 0 ForbrukerMeteret (CCI, right-hand scale) -5 15 2004 2005 2006 2007 2008 Sources: TNS Gallup and MakroSikt AS Chart 3.37 Private consumption1) and real house prices2). 4-quarter change. Per cent. 1993 Q1 – 2008 Q1 8 20 15 6 10 4 5 2 0 0 Private consumption, left-hand scale -5 House prices, right-hand scale -2 1993 1) 2) -10 1996 1999 2002 2005 2008 Seasonally adjusted and smoothed. Nominal house price index deflated by the consumer price index. Sources: Statistics Norway and Norges Bank Chart 3.38 House prices and credit to households (C2). Change in 3-month moving average. Annual rate. Seasonally adjusted. Per cent. January 2004 – May 2008 30 30 C2 House prices 20 20 10 10 0 -10 2004 0 -10 2005 2006 2007 2008 Sources: Norwegian Association of Real Estate Agents, Association of Real Estate Agency Firms, Finn.no, ECON Pöyry, Statistics Norway and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 Households’ assessment of the economic outlook and their own financial situation has been very positive for a long period. TNS Gallup’s trend indicator of household confidence shows a clear deterioration in household confidence since last summer (see Chart 3.36). The indicator is now lower than the historical average. ForbrukerMeteret from Makrosikt also shows a decline. Expectations of lower economic growth ahead may drag down growth in consumption. On the other hand, the increase in oil prices may generate impulses to consumption growth. Since 2003, household debt accumulation has been higher than household financial investment. On the whole, households’ financial position is still solid. The value of dwellings and financial assets is almost four times as high as total household indebtedness. Over time, there is a close relationship between the rise in real house prices and private consumption (see Chart 3.37). In recent years, the increase in asset prices has boosted the value of household wealth. Households must save more to maintain their wealth position as house price inflation slows. Assets and liabilities are unevenly distributed across households. Some groups now have small buffers against economic disturbances, particularly first-time homebuyers. The average repayment period for new home mortgages has increased markedly over the past seven years, and interest-only loans have become more widespread. This limits the scope for coping with higher interest expenses or income shortfalls by adjusting the repayment period. According to the Norges Bank lending survey, household credit demand eased from 2007 Q4 to 2008 Q1. Banks have also signalled more restrictive lending standards. The rate of household debt accumulation has moderated over the past year and is at its lowest level since 2004 (see Chart 3.38). Debt accumulation will probably continue to ease ahead. 49 Growth in real disposable income will slow this year and the saving ratio excluding share dividends may fall somewhat. Further ahead, tighter credit markets, lower house price inflation and higher interest rates will bring the fall in the saving ratio to halt and result in a renewed increase in household financial assets. Our projections are based on a gradual rise in the household saving ratio ahead. Chart 3.39 Real investment in manufacturing, housing and total for mainland Norway. Four-quarter growth. Per cent. 2006 Q1 – 2008 Q1 40 40 Manufacturing 30 30 Mainland Norway Housing 20 20 10 10 0 0 -10 Continued high business fixed investment Reflecting high domestic activity, solid profitability and low real interest rate, mainland business fixed investment has expanded at a rapid pace. Housing investment increased for a long period, but has recently fallen (see Chart 3.39). Lower housing investment was an important factor behind the decline in total domestic demand in the fourth quarter. In conjunction with higher interest expenses, it is likely that rising construction costs and falling house prices were important factors behind the fall in housing investment. The decline in house prices has levelled off, and house price inflation is expected to be low ahead. Housing investment is projected to contract through 2008 but to flatten out at a fairly high level further out. Continued high population growth and migration to urban areas may underpin housing investment. Petroleum investment statistics indicate sustained high petroleum investment ahead (see Charts 3.40 and 3.41). High oil prices are conducive to continued buoyant investment activity on the Norwegian continental shelf. Capacity constraints have hampered petroleum investment over the past year. We assume that these constraints will subside ahead. Several new projects are now being started and approved, which will boost activity in the course of the year. -10 -20 -20 2006 2007 2008 Source: Statistics Norway Chart 3.40 Investment statistics for the petroleum industry. Estimated and actual investment (current prices). In billions of NOK. 2005 - 2009 140 140 120 120 100 100 80 80 60 40 May Aug. Nov. Feb. 2005 2006 2008 2009 May Aug. 2007 60 Nov. 40 Actual Estimate published same year Source: Statistics Norway Chart 3.41 Investment in oil and gas recovery including pipeline transport. Investment level in billions of NOK (constant 2005prices) and annual growth (per cent). 1997 – 20111) 130 30 Annual growth, lefthand scale 20 110 10 90 0 -10 Manufacturing investment in mainland Norway has grown rapidly over the past year, particularly in the chemical industry which includes the production of silicon and solar cells, and in petroleum supplier industries such as the engineering industry and production of ships and 50 Investment level, righthand scale -20 50 -30 1997 1) 70 2001 2005 Projections for 2008 – 2011. Sources: Statistics Norway and Norges Bank 2009 Chart 3.42 Investment statistics for manufacturing. Estimated and actual investment (current prices). In billions of NOK. 2005 - 2009 40 40 30 30 20 20 2005 2006 2008 2009 2007 10 10 0 May Aug. Nov. Feb. May Aug. 0 Actual Nov. Estimate published same year Source: Statistics Norway Chart 3.43 Twelve-month growth in credit to mainland Norway.1) Per cent. January 2004 – March 2008 25 25 C3 mainland Norway 20 20 Businesses 15 15 10 10 5 5 0 2004 0 2005 2006 2007 2008 1) It is assumed that all foreign credit to mainland Norway is supplied to businesses. Source: Statistics Norway Chart 3.44 Price indices1) for Norwegian exports in NOK. 2004 = 100. 2004 Q1 – 2008 Q1 200 200 Metals 175 Pulp and paper products 150 150 125 125 100 100 75 75 1) 2006 2008 Norges Bank's estimates based on world market prices. Sources: Thomson Reuters, Statistics Norway and Norges Bank NORGES BANK The Norges Bank lending survey shows that banks are tightening credit standards for corporate customers. Higher premiums on loans for projects with credit risk would indicate that lending rates for enterprises will increase more than money market rates. Investments in the commercial property sector are normally highly leveraged, and stricter credit standards may curb investment in this sector. New orders for commercial buildings have drifted down so far this year from the high levels recorded in 2007. It is reasonable to assume that tighter credit markets will gradually feed through to activity in other business sectors. So far, however, corporate credit growth has remained firm (see Chart 3.43), which can partly be explained by continued buoyant activity in some business sectors around the beginning of 2008. At the same time, enterprises have had to draw increasingly on their lines of credit at Norwegian banks as other funding sources such as equity and bond markets have dried up. Corporate credit growth is expected to start moving down ahead. High oil prices, continued solid profitability, rising share prices and sustained high activity in some manufacturing sectors may curb the decline in corporate investment. Growth in corporate investment is nevertheless expected to fall gradually later in the year as interest rates increase and capacity constraints ease. 175 Farmed salmon and trout Aggregated export price index 2004 platforms. These are industries that have had very high capacity utilisation over the past year. The investment intentions survey for manufacturing indicates continued solid growth in 2008, with growth stalling thereafter (see Chart 3.42). MONETARY POLICY REPORT 2/2008 Somewhat higher domestic cost inflation and the strong real exchange rate will probably push down export growth. Prices for some key export goods have stabilised at a high level after a period of falling prices in 2007 (see Chart 3.44). Export growth is now expected to level off, followed by subdued growth to year-end. Import growth will fall in pace with the levelling off in consumption. The tendency towards a gradual rise in the import share is not expected to change substantially ahead. 51 Pronounced growth in public spending High oil prices have increased the room for fiscal manoeuvre in recent years. Looking ahead, the return on the Government Pension Fund – Global will have a steadily rising influence on the value of government wealth. In the Revised National Budget for 2008, the structural, non-oil budget deficit for 2008 is estimated at NOK 73.9bn, or 4.3% of trend GDP. At current prices, this is an increase of NOK 16.1bn, or 0.7 percentage point of trend GDP compared with 2007. By this measure, the proposed fiscal policy will have a stronger expansionary effect on the economy than assumed in the previous Report. In addition, it is estimated that nominal, underlying spending growth over the government budget will be 8.3% in 2008. Spending growth is higher than the government’s estimate for nominal mainland GDP growth of 6.4% (see Chart 3.45). According to the fiscal rule, the structural, non-oil budget deficit should average 4% of the capital in the Government Pension Fund – Global at the beginning of the year. The structural, non-oil budget deficit in the Revised National Budget is NOK 6.9bn lower than implied by the fiscal rule under a neutral cyclical situation. High oil prices generate prospects for strong growth in the Government Pension Fund – Global in the next few years. We assume that oil prices move in line with futures prices. Based on our oil price projections, the structural deficit will continue to be somewhat lower than the expected real return on the Fund in 2011 (see Chart 3.46). In the Revised National Budget, nominal growth in local government revenues is estimated at 6.2% in 2008, following growth of 5.5% last year. Wage growth in the local government sector will probably be somewhat higher than in the Revised National Budget, which implies that a higher share of revenues will have to be used to cover labour costs. 52 Chart 3.45 Nominal underlying spending growth in the government budget and nominal growth in mainland GDP. Per cent. 1993 – 2008 10 10 7.5 7.5 5 5 Growth in mainland GDP 2.5 2.5 Underlying spending growth 0 0 1993 1998 2003 2008 Sources: Ministry of Finance og Statistics Norway Chart 3.46 Expected real return on the Government Pension Fund – Global. In billions of 2008-NOK. 2004 – 2011 150 150 Effect of higher oil price Expected real return (RNB 08) Estimate MPR 2/08 Structural non-oil deficit RNB 08 120 120 90 90 60 60 30 30 0 0 2004 2006 2008 2010 Sources: Ministry of Finance (Revised National Budget 2008) and Norges Bank Boxes Underlying inflation SAM – System of models for short-term forecasting Projections in Monetary Policy Report 1/08 and 2/08 NORGES BANK MONETARY POLICY REPORT 2/2008 53 Underlying inflation The operational target of monetary policy is annual consumer price inflation of close to 2.5% over time. In general, the direct effects on consumer prices resulting from changes in the interest rate level, taxes, excise duties and extraordinary temporary disturbances shall not be taken into account. The consumer price index adjusted for tax changes and excluding energy products, CPI-ATE, has often been used as an indicator of underlying inflation. A main weakness of the CPI-ATE is that it not only excludes temporary effects of fluctuations in indirect taxes and energy prices, but also trend changes in these components. In recent years, energy prices have generally increased faster than other consumer prices (see Chart 1). As a result, CPI inflation over the past five years has on average been close to a half percentage point higher than CPI-ATE inflation.2 Looking back or ahead in time, we focus on developments in the total consumer price index (CPI). When assessing inflation today and the outlook for inflation ahead, today’s rise in CPI inflation does not necessarily provide a good guidepost. In recent years, the CPI has been influenced by wide, short-term swings in The integration of China and other electricity prices. low-cost countries into world trade has led to far lower prices for finIndicators of underlying inflation ished goods and has also resulted in seek to remove movements in con- strong economic growth and high sumer prices owing to temporary demand for oil and other commodidisturbances, which should be dis- ties. This has driven up energy and regarded when setting the interest commodity prices. Norwegian elecrate. tricity prices have also approached continental European electricity An ideal indicator of underly- prices as Norway’s external transing inflation should among other mission capacity has gradually been things:1 expanded. • have the same average rate of increase as the CPI over time • have lower monthly variations than the CPI • ignore temporary disturbances in the CPI 54 The more trend-like rise in energy prices and the trend fall in import prices partly reflect the same factor, i.e. the globalisation of trade in goods and services. Eliminating one of the effects and retaining the other may therefore distort the measure of underlying inflation. We have constructed an indicator of CPI inflation adjusted for tax changes and excluding temporary fluctuations in energy prices, CPIXE. Technically, the CPIXE is calculated as the CPI-ATE plus an estimated trend in energy prices in the CPI.3 Over time, the CPIXE will rise at about the same rate as the CPI, unless indirect taxes change substantially. The new indicator has approximately the same trajectory as the CPI-ATE, but with a level difference that depends on the estimated trend rise in energy prices. Since energy prices have risen faster than other prices in recent years, the rate of increase in the CPIXE has been higher than the rise in the CPIATE (see Chart 2). The estimated trend rise in energy prices today and the estimate of the CPIXE depend on projected energy prices ahead.4 If actual or expected developments in energy prices turn out to be different, the CPIXE estimate may change, also historically. The new indicator of underlying inflation does not entail a new assessment of underlying or future inflationary pressures in the Norwegian economy. As part of the Executive Board’s assessment underlying interest rate decisions since 2006, Norges Bank has regularly published the Bank’s assessment of underlying inflation, often in the form of an interval. The projections Chart 1 Energy prices in the CPI1) and CPI-ATE2). Index. January 1995 = 100. January 1995 – May 2008 220 Chart 2 CPI, CPI-ATE1) and CPIXE2). 12-month change. Per cent. January 2004 – May 2008 220 Energy prices in the CPI CPI-ATE 200 180 180 160 160 140 140 120 120 100 100 80 1995 1) 2) 80 1997 1999 2001 2003 2005 2007 Including electricity and fuel products CPI adjusted for tax changes and excluding energy products Sources: Statistics Norway and Norges Bank CPI CPI-ATE CPIXE 5 200 5 2.5 2.5 0 0 -2.5 2004 -2.5 2005 2006 2007 2008 1) CPI adjusted for tax changes and excluding energy products CPI adjusted for tax changes and excluding temporary fluctuations in energy prices 2) Sources: Statistics Norway and Norges Bank 1 See, for example, speech by Governor Svein of underlying inflation have generally been somewhat higher than actual CPI-ATE inflation. Gjedrem at the Centre for Monetary Economics/BI on 6 June 2006 for a further discussion of underlying inflation. 2 Adjusting for this, the CPI-ATE has fairly good properties as an indicator of the underlying rise in Like the traditional indicators, the new indicator will not be a perfect measure of underlying inflation at all times. It will always be difficult to estimate those price movements that will persist and those with only a short-tem impact on the CPI. The assessment of underlying price pressures will therefore always have to be based on several different indicators and an analysis of the underlying reasons for the price changes. NORGES BANK consumer prices and future inflation, see Jonassen and Nordbø (2006): “Indicators of underlying inflation in Norway”, Economic Bulletin 4/2006, pp 195-204. 3 ΔCPIXE=(1-wE)ΔCPI-ATE + wE ΔCPI-ENERGY, where ΔCPIXE is the 12-month rise in the new indicator, ΔCPI-ATE is the 12-month rise in the CPI-ATE and ΔCPIENERGY is the 12-month rise in the energy price trend. wE is energy products’ weight in the CPI. The energy price trend is estimated using a Hodrick Prescott filter with a standard smoothing parameter (λ=14400) on historical monthly figures for energy prices in the CPI and the path for energy prices applied in this Report (see Chart 3.12). 4 See Economic Commentaries 3/08 ”CPIXE – a new indicator for underlying inflation”, www.norges-bank.no, 26 June 2008. MONETARY POLICY REPORT 2/2008 55 SAM – System of models for short-term forecasting In its analyses of monetary policy and interest rate forecasts, Norges Bank uses the model NEMO1. These analyses are based on separate projections for the next few quarters. These short-term projections are based on current information and a number of statistical and econometric models. The published projections are the result of an overall assessment based on both models and judgement. Reality cannot be captured by any single model. Different models have different properties, and they describe different aspects of economic developments. Experience shows that a weighted average of different model-based forecasts is often more accurate than forecasts from individual models.2 Averaging the forecasts also reduces the uncertainty surrounding the choice of model. Norges Bank has therefore developed a System for Averaging Models (SAM) for averaging shortterm forecasts for inflation (measured by the CPI-ATE) and GDP provided by different new models. The models have been developed to produce accurate forecasts up to one year ahead. The work on SAM has been in progress since autumn 2006. A number of central banks have developed similar model systems, see for example Andersson and Løf (2007) and Kapetanios et al. (2007). A brief description of the estimated, empirical models included in SAM and how forecasts generated by the 56 different models are averaged is • Factor models are based on provided below.3 large datasets. We have different models using monthly (FM) In the analyses in this Report, the and quarterly (FQ) economic following types of models are invariables. Based on correlation cluded in SAM: between the different variables, the datasets are reduced to a few common factors. These • ARIMA models (AutoRegressive Integrated Moving Average) factors are then used in various use historical variations in a equations to provide forecasts time series to provide forecasts. of economic developments.4 The forecasts can be regarded • Simple indicator models forecast as an advanced form of trend the aggregate effect on GDP of, extension. for example, manufacturing • VAR models (Vector AutoReproduction, employment, retail gressive) are based on statistisales, hotel occupancy rates and cal relationships between for building starts. example GDP, interest rates • Term structure models (Tstruc) and inflation. The models take use information about the term into account that there may be structure of interest rates in the comovement between these Norwegian money market and variables. All the variables are in the interest rate swap mara function of lagged values of ket in order to forecast GDP. We look at the difference beitself and the other variables. • BVAR models (Bayesian VAR). tween short-term interest rates In these models, a priori re(3-month) and long-term rates strictions are imposed on a (up to 5 years). VAR model. The restrictions • Error correction model that concan be based on data or insight tains econometric equations for from economic theory. Such a prices, wages, the interest rate, priori information can reduce the krone exchange rate, prothe uncertainty surrounding ductivity and mainland GDP.5 the estimates and these models • Dynamic stochastic general have often proved to have betequilibrium model (DSGE) is ter forecasting properties than based on economic theory. The the classic VAR models. In model is estimated and embodaddition to GDP, interest rates ies the most important channels and inflation, the BVAR models for the relationship between also include exchange rates, oil monetary policy and key macprices and a number of countryroeconomic variables.6 specific variables. Chart 2 Standard error (RMFSE) of mainland GDP forecasts. Some selected models and SAM1) Chart 1 Standard error (RMFSE) of CPI-ATE forecasts. Some selected models and SAM1) 0.8 0.8 0.6 0.6 0.4 0.4 2.0 2.0 1.6 1.6 1.2 1.2 0.8 FQ VAR ARIMA SAM 0.2 0.2 0.0 Horizon 1 Horizon 2 Horizon 3 0.0 Horizon 4 0.4 0.0 Horizon 1 1) 1) 0.8 FM BVAR ARIMA SAM Tstruc BVAR Horizon 2 Horizon 3 0.4 0.0 Horizon 4 See text for further explanation. Source: Norges Bank See text for further explanation. Source: Norges Bank Within each model class, there are several variants with different specifications. In total, SAM contains about 80 models. dure is repeated until the estimation period reaches 2007 Q4, when the last weights are determined. Finally, the weights of the different models are calculated as an average of the weights throughout the period. The models that provide the best forecast of developments throughout the period since 1999 are assigned the highest weight. The forecasts are a weighted average of the forecasts from about 10% of the models. In SAM the different models are weighted by how accurately they have forecasted economic developments one to four quarters ahead. There is a set of weights for each forecast horizon. We use data for the period 1999 Q2 to 2008 Q1 to determine the weights. The weights are calculated on the basis of how Charts 1 and 2 show the standard accurately the models forecasted deviations for SAM forecast eractual developments. rors and some of the most accurate individual models at the one-toThe models are first estimated with four-quarter horizon for inflation data up to and including 1999 Q1. and GDP respectively. SAM has Each model’s forecast error for substantially lower standard deviathe next four quarters is then used tions than individual models with to assign a weight to each model. relatively few explanatory variables Thereafter, the estimation period is for all horizons. This shows the benextended by one quarter to 1999 Q2, efit of averaging the forecasts from and a new set of weights for the four several models. For inflation, howhorizons is calculated. This proce- ever, Chart 1 shows that the stand- NORGES BANK MONETARY POLICY REPORT 2/2008 ard deviations of the factor model are almost as low as those of SAM. Factor models contain a very large number of explanatory variables, and the common factors can be interpreted as an averaging of large amounts of information. Chart 3 illustrates the spread of inflation forecasts from the eight best models for the period 2008 Q2 to 2009 Q1. The composition of the eight best models varies from horizon to horizon. The forecast from each model is marked by a point, and the averaged forecast from SAM is shown by the solid line. For example, the eight best models forecast inflation at 2.2 – 2.4% in 2008 Q2, and the averaged forecast from SAM is 2.3%. The spread among the eight best models increases further out in the period. Inflation is forecast between 1.8 and 3.4% in 2009 Q1, while the averaged SAM inflation forecast is 2.75%. 57 Chart 3 CPI-ATE and forecasts. SAM and the eight best models at each horizon. Four-quarter growth. Per cent 3 3 2 2 1 Chart 4 Mainland GDP and forecasts. SAM and the eight best models at each horizon. Four-quarter growth. Seasonally adjusted. Per cent 8 8 6 6 4 4 2 2 1 0 0 2006 2007 2008 0 2009 0 2006 2007 2008 2009 Sources: Statistics Norway and Norges Bank Sources: Statistics Norway and Norges Bank Chart 5 CPI-ATE and historical forecasts from SAM one quarter ahead. Four-quarter growth. Per cent Forecast 3 Forecast Actual 3 3 2 2 2 2 1 1 1 1 0 0 1999 0 1999 2001 2003 2005 2007 3 0 2001 2003 2005 2007 Sources: Statistics Norway and Norges Bank Sources: Statistics Norway and Norges Bank Chart 7 Mainland GDP and historical forecasts from SAM one quarter ahead. Four-quarter growth. Seasonally adjusted. Per cent Chart 8 Mainland GDP and historical forecasts from SAM two quarters ahead. Four-quarter growth. Seasonally adjusted. Per cent 8 8 8 Forecast 8 Forecast Actual Actual 6 6 6 6 4 4 4 4 2 2 2 2 0 0 1999 0 1999 2001 2003 2005 Sources: Statistics Norway and Norges Bank 58 Actual Chart 6 CPI-ATE and historical forecasts from SAM two quarters ahead. Four-quarter growth. Per cent 2007 0 2001 2003 2005 Sources: Statistics Norway and Norges Bank 2007 As chart 3 shows, uncertainty increases at longer horizons. In longerterm projections, greater weight will therefore be given to forecasts from larger macroeconomic models such as NEMO and discretionary assessments. averaging forecasts from several individual models. Accuracy increases and uncertainty is reduced. In addition, we have seen that the development of new types of models has reduced the uncertainty surrounding the forecasts. In our work ahead, we will expand SAM to provide forecasts of more variables. Based on the experience so far, we will consider whether other methods of averaging forecasts can provide more precise forecasts. We will also work on averaging models based on both point forecasts and forecast uncertainty.7 Chart 4 illustrates a similar pattern for the forecasts for mainland GDP growth. According to the SAM forecast, growth in mainland GDP slows later in the year, but picks up again somewhat in 2009 Q1. Again, the spread in the forecasts is greater later in the period, reflecting increased uncertainty at longer horizons. References Andersson, M. K. and M. Løf (2007): Charts 5 and 6 show SAM-based his- The Riksbank’s new indicator protorical forecasts of CPI-ATE inflation cedures. Economic Reviews 1/2007, one and two quarters ahead together Sveriges Riksbank. with actual developments. Charts 7 and 8 show corresponding SAM- Akram, Q. F. (2008): An econometric based forecasts for mainland GDP model of mainland Norway: EMod, growth one and two quarters ahead mimeo, Norges Bank together with actual developments. The charts show what the forecasts Bårdsen, G., Ø. Eitrheim, E. S. for inflation and GDP would have Jansen and R. Nymoen (2005): The been one to two quarters ahead if Econometrics of Macroeconometric the short-term projections in this Modelling. Oxford University Press, period (1999-2007) had been based Oxford. on SAM. CPIXE projections can be generated on the basis of forecasts Jore, A. S., J. Mitchell and S. P. from SAM and estimated energy Vahey (2008): Combining forecast trends (see box on page 54). densities from VARs with uncertain instabilities. Working Paper 1/2008, Preliminary results using SAM indi- Norges Bank. cate that there are clear advantages to NORGES BANK MONETARY POLICY REPORT 2/2008 Kapetanios, G., V. Labhard and S. Price (2007): Forecast combination and the Bank of England’s suite of statistical forecasting models. Working Paper no. 323, Bank of England. Stock, J. H. and M. W. Watson (2007): Why has U.S. inflation become harder to forecast? Journal of Money, Credit and Banking 39, 1, supplement. Timmermann, A. G. (2006): Forecast combinations. Chapter 4 in G. Elliott, C. W. J. Granger and A.Timmermann (Ed.) Handbook of Economic Forecasting, Vol. 1. North Holland. Aastveit, K. A. and T. Trovik (2007): Nowcasting GDP: The role of asset prices in a small open economy. Working Paper 2007/9, Norges Bank. 1 See the box “NEMO – a new projection and monetary policy analysis model” in MPR 3/07. 2 See for example Timmermann (2006) and Stock and Watson (2007). 3 For further detail, see the description of SAM in a forthcoming Staff Memo. 4 See Aastveit and Trovik (2007) who describe the factor model based on monthly data (FM) for projecting developments in mainland GDP. 5 The model is documented in Akram (2008). It builds on previous econometric studies, see for example Bårdsen et al. (2005). 6 An example of this type of model is NEMO, see box in MPR 3/07. 7 See for example Jore, Mitchell and Vahey (2008). 59 Projections in Monetary Policy Report 1/08 and 2/08 This box provides an account of the changes in projections since Monetary Policy Report 1/08. New information since March has influenced our assessment of both the current economic situation and how different driving forces will influence developments in the years ahead. On balance, the outlook and balance of risks suggest that the key policy rate should be raised further from its current level and set somewhat higher than projected in the previous Report. Norges Bank’s projections for 2008 are also compared with projections from other institutions. New since Monetary Policy Report 1/08 The following points summarise developments in the economy that have led to changes in our projections for the current year and the period ahead: • The turmoil in financial markets has eased somewhat since mid-March, and investors’ risk appetite has recovered somewhat. Global equity prices have risen. Premiums in global money and credit markets remain high. • Economic growth among our trading partners is expected to be slightly lower than we previously assumed, even though growth in Q1 was stronger than expected. Inflation among our trading partners has been stronger than we previously assumed. The projection for 60 • • • • • inflation has been revised up by ¾ percentage point in 2008 and ½ percentage point in 2009. Interest rate expectations among our trading partners have risen markedly since the last Report. Norwegian money market rates have risen more than movements in the policy rate would warrant. The premium is expected to remain around ¼ percentage point higher in the immediate future than estimated in the previous Report. The NOK has been somewhat weaker than assumed. CPI-ATE inflation has been slightly higher than projected. Prices for domestically produced goods and services excluding energy products have risen somewhat more than expected, while prices for imported consumer goods have been largely as expected (see Chart 1). Petrol prices have risen more than expected. The price of oil has climbed further. Futures prices for both electricity and oil are substantially higher than in March. Preliminary national accounts figures indicate that mainland GDP growth slowed in Q1. Household consumption and housing investment have been weaker than expected, while corporate investment has held up better than expected. Ex- ports have been somewhat weaker than anticipated. • Employment growth has again been considerably stronger than expected. Increased participation rates and higher inward labour migration have resulted in stronger growth in the labour force than expected. As we projected, unemployment has been largely unchanged. Productivity growth has been lower than expected. • Oil investment will probably grow slightly more next year than we previously assumed. Fiscal policy will be more expansionary from 2007 to 2008 than assumed in the previous Report. Changes in the projections The interest rate forecast on which the projections in this Report are based is slightly higher than that in Monetary Policy Report 1/08. Section 1 provides a more detailed account of interest rate developments ahead. Domestic price developments may imply slightly stronger domestic price and cost pressure than previously projected. As expected, low unemployment has led to high wage growth. CPI inflation is expected to rise markedly from 2007 to 2008, and further than previously assumed (see Table 1). Electricity prices have been substantially higher than in the first part of 2007 and may remain slightly higher than assumed in the previous Report. An unexpectedly large increase in oil prices has also resulted in a sharper rise in petrol prices in recent months than we expected. Consumer price inflation adjusted for tax changes and excluding energy products (CPI-ATE) is also now expected to be higher this year and into 2009 than in the previous Report (see Chart 2). This upward revision is due to a higher expected increase in prices for domestically produced goods and services in particular. The projections for subsequent years are somewhat lower than in the previous Report. previously. Higher interest costs, coupled with substantially stronger inflation than previously projected, will put a damper on growth in real disposable income this year. The projection for household consumption growth this year has been revised down significantly. The saving ratio excluding dividends may nevertheless fall somewhat this year. The projections for private consumption growth further ahead have not been revised significantly, and we still expect the saving ratio to rise gradually. Corporate investment is expected to be higher this year than projected in the previous Report. Further ahead, investment growth is expected to slow more markedly than previously assumed due to higher borrowing costs and a tighter credit market. Global economic growth seems to be slowing somewhat later than previously assumed. Although exports have been somewhat weaker than projected in March, we anticipate some- The projection for mainland GDP growth in 2008 has been revised down slightly since the previous Report. Household demand slowed more than expected in Q1. Consumption growth was weak, and housing investment fell. We now anticipate a sharper drop in housing investment this year than we did Chart 1 CPI-ATE.1) Total and by supplier sector2). 12-month change. Per cent. January 2005 – December 20083) 6 6 Domestically produced goods and services what stronger growth through the remainder of this year than in the previous Report. We still anticipate more subdued export growth further ahead. The public sector is expected to have a somewhat greater expansionary influence on the economy this year than assumed in the previous Report, but our projections for subsequent years are largely unchanged. We now expect net inward migration to hold up longer than assumed in the previous Report, but at a markedly lower level than over the past couple of years. Overall population growth in the period to 2011 has been revised up by ¾ percentage point since the previous Report. Employment growth is projected to slow in 2009 and 2010, and to a somewhat further extent compared to the March Report. Unemployment is expected to be slightly lower towards the end of the projection period than in the previous Report. Chart 2 Projected CPI-ATE in the baseline scenario in MPR 1/08 with fan chart and CPI-ATE in the baseline scenario in MPR 2/08 (red line). 4-quarter change. Per cent. 06 Q1 – 11 Q4 5 5 Imported consumer goods 4 4 CPI-ATE 2 2 0 0 MPR 2/08 -2 2.5 2.5 -2 MPR 1/08 -4 2005 1) 2) 3) -4 2006 2007 2008 CPI-ATE: CPI adjusted for tax changes and excluding energy products. Norges Bank's estimates. Projections for June 2008 – December 2008. Sources: Statistics Norway and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 90% 0 Mar-06 70% 50% 30% 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sources: Statistics Norway and Norges Bank 61 All in all, capacity utilisation this year is expected to be largely as projected in the previous Report. As before, capacity utilisation is expected to fall in subsequent years. The output gap is expected to be around zero at the end of 2011 (see Chart 3). Forecasts from other institutions Our projection for economic growth in 2008 is somewhat higher than the forecast from Statistics Norway, but approximately in line with the projection from the Ministry of Finance and the average projection from Consensus Forecasts (see Chart 4). We project mainland GDP growth of 3¼% this year. Statistics Norway’s forecast for mainland GDP growth was 2.9% at the end of May, which is slightly higher than its February forecast of 2.8%. In the Revised National Budget for 2008, the Ministry of Finance predicted GDP growth of 3.2% in 2008, up from 2.8% when the National Budget was presented last autumn. The average forecast for GDP growth from Consensus Forecasts fell from 3.4% in March to 3.3% in June. In this Report, Norges Bank projects CPI inflation of 4% in 2008 (see Chart 5). The Ministry of Finance is projecting CPI inflation of 3.2%, up from 2½% in October. Since February, Statistics Norway has revised up its projection for CPI inflation in 2008 by 0.4 percentage point to 3.9%. The average forecast for CPI inflation from Consensus Forecasts fell slightly from 3.4% in March to 3.2% in June. In this Report, CPIATE inflation is projected at 2½% in 2008 (see Chart 6). The Ministry of Finance is projecting CPI-ATE inflation of 2.4%, up from 2% last autumn. Since February, Statistics Norway has revised up its projection for CPI-ATE inflation in 2008 by 0.3 percentage point to 2.5%. Consensus Forecasts does not compile projections for CPI-ATE inflation. The Ministry of Finance’s forecasts were published on 5 October 2007 and 15 May 2008. Statistics Norway published its projections on 21 February and 29 May. Consensus Forecasts compiled its forecasts on 10 March and 9 June. As the institutions publish projections at different times, the information on which the projections are based will differ. Table 1 Projections for macroeconomic aggregates in Monetary Policy Report 2/08. Change from projections in Monetary Policy Report 1/08 in brackets 2008 2009 2010 2011 Mainland demand 3¼ (-½) 1¾ (-¼) 2 (-½) 3 (0) GDP mainland Norway 3¼ (-¼) 2 (0) 2½ (¼) 3 (¼) Employment 2¾ (½) ½ (¼) -¼ (-¼) ½ (¼) LFS unemployment (rate) 2½ (0) 3 (0) 3½ (-¼) 3¾ (-¼) CPI-ATE 2½ (¼) 2¼ (0) 2½ (0) 2½ (-¼) CPI 4 (1) 3¼ (½ ) 2½ (0) 2½ (-¼) Annual wage growth 6 (0) 5½ (0) 5 (0) 4¾ (0) Source: Norges Bank 62 Chart 4 Mainland GDP. Projections for 2008 published at different times. Percentage growth Chart 3 Estimated output gap in the baseline scenario in MPR 1/08 with fan chart and output gap in the baseline scenario in MPR 2/08 (red line). Per cent. 06 Q1 – 11 Q4 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 90% -2 -3 Mar-06 70% 50% 30% -2 5 4 4 3 3 2 2 1 1 0 -3 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Chart 5 CPI. Projections for 2008 published at different times. Percentage growth 5 5 4 4 3 3 2 2 1 1 Oct May FIN Feb May SN Mar Jun CF Mar Jun NB 0 Sources: National Budget 2008, Revised National Budget 2008, Economic Survey 1/2008 and 3/2008, Consensus Forecasts March 2008 and June 2008, Monetary Policy Report 1/08 and 2/08 NORGES BANK MONETARY POLICY REPORT 2/2008 Oct May FIN Feb May SN Mar Jun CF Mar Jun NB 0 Sources: National Budget 2008, Revised National Budget 2008, Economic Survey 1/2008 and 3/2008, Consensus Forecasts March 2008 and June 2008, Monetary Policy Report 1/08 and 2/08 Source: Norges Bank 0 5 Chart 6 CPI-ATE. Projections for 2008 published at different times. Percentage growth 4 4 3 3 2 2 1 1 0 Oct May FIN Feb May SN Mar Jun NB 0 Sources: National Budget 2008, Revised National Budget 2008, Economic Survey 1/2008 and 3/2008, Monetary Policy Report 1/08 and 2/08 63 Boxes 2004-2008 2 / 2008: Underlying inflation SAM – System of models for short-term forecasting 1 / 2008: Factors driving the rise in domestic and global food prices Cross-checks for the krone exchange rate Evaluation of Norges Bank’s projections for 2007 3 / 2007: Household saving NEMO – a new projection and monetary policy analysis model 2 / 2007: Is global inflation on the rise? Developments in productivity growth How often do enterprises change their prices? 1 / 2007: Will the global economy be affected by a slowdown in the US? Uncertainty surrounding wage growth ahead Competition and prices Evaluation of Norges Bank’s projections for 2006 3 / 2006: Output gap 2 / 2006: Money, credit and prices – a monetary cross-check Foreign labour in Norway Short-term forecasts for mainland GDP in Norway 1 / 2006: Choice of interest rate path Productivity growth in Norway The yield curve and economic outlook in the US Evaluation of Norges Bank’s projections for 2005 64 3 / 2005: Uncertainty surrounding future interest rate developments Accuracy of short-term interest rate expectations Output gap uncertainty Increased imports from low-cost countries The effects of high oil prices on the global economy 2 / 2005: Developments in the krone exchange rate 1 / 2005: Criteria for an appropriate future interest rate path Why are long-term interest rates so low? Low inflation in the Nordic countries Developments in household debt Evaluation of Norges Bank’s projections for 2004 3 / 2004: Estimated relationship for interest rate setting Developments in household debt Norges Bank’s foreign exchange purchases for the Government Petroleum Fund The current account surplus and demand for Norwegian kroner 2 / 2004: Increase in number of working days in 2004 Financial stability Norges Bank’s estimate of the output gap A change in inflation expectations? What are the factors behind the rise in oil futures prices? 1 / 2004: Low external price impulses to the Norwegian economy The pass-through from the krone exchange rate to prices for imported consumer goods The effects of the reduction in interest rates on household income The krone exchange rate and exchange rate expectations Evaluation of Norges Bank’s projections for 2003 Annex l Regional network NORGES BANK MONETARY POLICY REPORT 2/2008 65 Norges Bank’s regional network Norges Bank’s regional network was established in autumn 2002 and consists of enterprises, local authorities and regional health enterprises throughout Norway. Five times a year, we interview business and community leaders concerning financial developments in their enterprises and industries. Each round includes interviews with about 290 contacts. The selection of contacts reflects the production side of the economy, in terms of both industry sector and geographic area. The network comprises approximately 1 500 persons who are interviewed about once a year. tion on the state of the Norwegian economy. Regular communication with local contacts in Norway’s business and community life provides us with information earlier and more frequently than available official statistics. It also provides us with supplementary information about areas not covered by other statistical sources, and we learn which issues are of particular concern to enterprises. In addition, the regional network will provide us with insight into the effects of specific events or can be used to study relevant issues. Official statistics will continue to form the basis for our perception of the state of the economy, but the The primary purpose of the regional time lags and revisions associated network is to obtain current informa- with these statistics make supple- mentary sources, such as our regional network, useful. The information obtained from the regional network, along with other available information on economic developments, will provide a basis for Norges Bank’s projections as presented in the Monetary Policy Report and other published material. We have divided Norway into seven regions. For six of them we have engaged regional research institutions that are responsible for the network in their respective regions and to have meetings with contacts on behalf of Norges Bank. The following institutions have been selected: Table 1 Norges Bank’s regional network 66 Regions Institutions Region North (Nordland, Troms, Finnmark) Kunnskapsparken Bodø Region Central Norway (Nord- and Sør-Trøndelag) Center for Economic Research at the Norwegian University of Science and Technology Region North-West (Møre og Romsdal, Sogn og Fjordane) Møreforskning Molde Region South-West (Rogaland and Hordaland) International Research Institute of Stavanger Region South (Aust- and Vest-Agder, Telemark, Vestfold) Agderforskning Region Inland (Hedmark and Oppland) Østlandsforskning Region East (Buskerud, Akershus, Oslo, Østfold) Covered by Norges Bank Summary of contact rounds since Monetary Policy Report 1/08 In the contact rounds that were conducted in March and May, roughly 570 regional network contacts were interviewed. A national summary is published on Norges Bank’s website. The summary below is based on regional reports from the institutions responsible for the various regions and does not necessarily represent Norges Bank’s views on economic developments. Demand, output and market outlook The enterprises in the regional network report markedly lower growth in demand and production through spring 2008. Growth is appreciably weaker than the contacts had expected. Growth has slowed in virtually all regions and industries with the exception of oil-sector suppliers, where growth remains buoyant. Companies’ expectations for the next six months indicate that growth will remain at its current moderate level. Compared with expectations at the beginning of the year, current expectations imply that growth will decrease by half, primarily as a result of financial turbulence, slower global growth and higher interest rates. ring, manufacturers supplying the building and construction industry in particular report lower growth. Reduced residential construction has led to a levelling off and a decline in the industry. The rate of growth in domestically oriented manufacturing is expected to remain stable over the next six months. There is considerable uncertainty among building and construction industry suppliers with regard to the outlook for the industry. Continued decline is expected in residential construction, and even though so far some compensation has been provided by increased activity in commercial building, this segment is also expected to slacken ahead. The processing industry reports continued high activity and increased demand in the international market. Capacity constraints, however, are still limiting companies’ ability to exploit this growth. The fish farming industry reports growth in output and export. Manufacturing supplying goods and services to the fishery and fish-farming industry reports solid growth. The manufacturing segment that is affected by developments in the international building and construction sector reports lower demand and activity. The market outlook for the export industry implies moderate growth in the next six months. The rate of growth in manufacturing is moderate, and is falling compared with earlier this year. Growth is moderate in manufacturing for both Growth among oil-sector supplithe domestic and export markets. In ers is still solid. Owing to high oil domestically oriented manufactu- prices, exploration activity is high. NORGES BANK MONETARY POLICY REPORT 2/2008 Platform lifetimes are also being extended, increasing the demand for maintenance. Growth is expected to remain buoyant for the next six months. In the building and construction industry, growth is slowing further and is moderately negative for the first time since 2003. Building contractors in particular are feeling the effect of reduced demand, while operators at the lower end of the value chain – such as electricians – are still experiencing strong growth. The impression is that residential construction is being reduced, and that growth in the home improvement and commercial property markets is not fully compensating for reduced activity. A number of contacts report that sales of new homes have in practice come to a complete halt. Competition in the commercial property market is reported to have intensified since many operators that previously confined themselves to the residential segment, are now submitting tenders in other segments. The construction market is still exhibiting positive developments. A further fall in demand and output in the building and construction industry is expected in the next six months. In retail trade, growth is moderate and the rate of growth is declining compared with earlier this year. Growth is reported to be strongest in 67 the North-West and South-West Regions and weakest in Regions East and North. Owing to cold weather earlier this year and higher interest rates, sales of footwear, clothing and sports equipment have decreased, particularly in Region East. Moderate growth in demand and activity in retail trade is expected over the next six months. Demand for expensive capital goods is expected to slacken, while some growth is expected in demand for sports equipment, clothing and other consumer goods. The industry recording the strongest growth after oil-sector suppliers is services, although growth has also slowed markedly in this industry. Financial services are dragging down growth. Commercial services are also exhibiting somewhat slower growth than previously. Capacity utilisation, the labour market and investment Capacity utilisation is still high, but lower than at end-2007 and a year ago. 55% of companies report that they would have some or considerable difficulty in accommodating an increase in demand, while 44% report that the supply of labour would limit production if demand increased. These percentages are lower than in the interview round in November. The labour market seems to be somewhat less tight. As previously, capacity utilisation is highest in building and construction (see Chart 1). Capacity is limited in particular by a shortage of project managers and engineers. The supply of craftsmen – particularly carpenters and bricklayers – is ample, and a number of contacts report plans for 80 100 Building and construction Retail trade Manufacturing Services Public sector 80 60 60 40 40 20 20 0 2005 0 2006 2007 Source: Norges Bank’s regional network 2008 All industries report moderate growth in planned investment over Chart 2 Expected change in selling prices over the next 12 months. Diffusion index1). January 2005 – May 2008 Chart 1 Share of contacts where the supply of labour is a constraint on output. Per cent. January 2005 – May 2008 100 lay-offs at the end of summer. The situation for building and construction suppliers has changed since last year. While capacity was low last year, contacts now report full warehouses, rationalisation and fears of a considerable decline. The services sector indicates that fewer people are changing jobs and recruiting is easier, although there is still a skills shortage in the hotel and restaurant industry, and among cleaning staff, architects, engineers, economists, accountants, lawyers and IT personnel. As previously, municipalities find that they cannot compete effectively for technical personnel, architects, economists and health care personnel. 70 70 60 60 50 50 Retail trade and household services 40 30 30 2005 2006 2007 2008 1) Share of contacts expecting higher rise in prices + (0,5* share of contacts expecting stable prices) Source: Norges Bank’s regional network 68 40 Manufacturing, building and construction and corporate services the next 12 months. There are prospects for moderate growth in the local government and hospital sector and retail trade, while investment growth in manufacturing and services is tending towards zero. All industries are planning somewhat slower investment growth one year ahead than last autumn. One of the reasons is that investment has been substantial in many industries in recent years and there is less need for investment now. Employment Employment is still increasing, but at a slower rate than earlier. Growth is also planned ahead, at about the same rate as in the past three months. Employment has increased most in services, which is also the industry planning the strongest growth ahead. The impression is that the contacts spend considerable time and resour- NORGES BANK ces on recruitment, and that many and construction prices has slowed use external recruiting agencies. somewhat, it is still strongest in this industry, followed by corporate serCosts, prices and profitability vices. The majority of our contacts Expectations concerning annual expect a slower rise in prices over wage growth in 2008 are higher the next twelve months, particularthan earlier this year. Annual wage ly in manufacturing, building and growth is expected to average 5¾%. construction and corporate serviExpectations vary between 5% and ces. The rise in prices in retail trade 6% across industries. The building and household services is expected and construction and service indus- to remain broadly unchanged (see tries have the highest expectations, Chart 2). while retail trade and manufacturing have the lowest. However, many Overall operating margins among contacts express concern that the contacts are rising, but at a more final wage agreement will be more moderate pace. Margins in the exexpensive than expected. port and offshore industries and in retail trade have been lower in the The rise in prices is slowing some- past three months compared with what from the highest in the regional the same period a year ago. Margins network’s history recorded in No- are still increasing in domestically vember last year. Price rises have oriented manufacturing, building eased in all industries except servi- and construction and household ces. Even though the rise in building services. MONETARY POLICY REPORT 2/2008 69 Enterprises and organisations that have been interviewed in the work on Monetary Policy Report 2/08 07 Gruppen 3T Produkter AS Adecco Adresseavisen ASA Advokatfirmaet Schjødt AS Aibel AS Airlift AS Ait Trykk Otta AS Aker Kværner IPEC AS Aker Kværner Verdal AS Aker Seafoods J. M. Johansen AS Aker Solutions ASA Aker universitetssykehus HF Akerhus fylkeskommune Akershus universitetssykehus Aksel Endresen Transport AS Aktiv Eiendomsmegling Akva Group ASA Alta Logistics AS Alta Møbler AS Amfi Drift AS Anton Sport Aquaterm AS Arbor-Hattfjelldal AS Arendal Auto AS Arendal kommune Arki Arkitektar AS AS Nesseplast Asker kommune Askim kommune Asp AS Atelier Ekren AS Aukra-Midsund Offshore AS Avinor AS, Værnes Axess AS Bakers AS Bekk Consulting AS Bergen Kino AS Bergen kommune Bergene Holm AS BeWi Produkter AS Bilalliansen AS BioMar AS Birkenes kommune Black Design AS Block Berge Bygg AS Block Watne AS Bodø Transport & Caravan AS Bohus Bomøbler AS Bohus Interiørsenter AS Boliden AS Br. Reme AS Bragerhaug & Beitostølen AS Bright ID AS Brødrene Midthaug AS 70 Brødrene Røsand AS Brødrene Sperre AS Bunnpris Bussen Trafikkselskap AS Byggmester Grande AS Byggmo Eiendom AS Byåsen Bakeri AS Bølgen og Moi AS Båtservice Holding AS Cad Net Øst AS Celsa Armeringsstål AS CHC Norway Cicero Annonsebyrå AS Clarion Hotel Ernst AS Clear Channel Norway AS Comfort Hotel Hammer AS Coop Haugaland Coop Inn-Trøndelag BA Coop Midt-Troms BA Coop Nordfjord og Sunnmøre BA Credicare Førde CTM Utvikling AS Dale Bruk AS DDB Oslo AS Deloitte Norge AS Den Norske Bank ASA, Region Sørlandet Den Norske Bank ASA, Tønsberg Destinasjon Skeikampen AS Diakonhjemmet Dinamo Norge AS Diplom-Is AS DnB NOR DnB NOR Eiendom Bodø AS DnB NOR Næringsmegling DNH Den Norske Høyttalerfabrikk As Dokka Fasteners AS Domstein ASA Domstein Enghav Haugesund Dovre International AS Drag Industrier AS Drammen kommune EDB Gruppen Norge AS EFG Hov Dokka AS Egil Kristoffersen & Sønner AS Eidesvik Offshore ASA Eidsvaag AS Eiendom Sør og Bygg AS Einar Valde AS Elektro Bodø AS Elektro Hvitevarer AS Elektro Team AS Elkem Aluminium ANS avd. Mosjøen Elkem ASA Materials Elkjøp Norge, Giganten Fana Elkjøp Norge, Forus Elkjøp Norge, Stormarked Tromsø Ellingsen Seafood AS Ellos AS ELMO Eltek Energy AS Elvemo og Hjertås Bygg AS Eramet Norway ErgoGroup AS Ernst & Young AS Euronics Norge AS Eurosko Norge AS Exbo Sørlandet AS Fabi AS Fame fotografene AS Farstad Shipping AS Ferner Jacobsen Finnmark Mur og Puss AS Finnøy Gear & Propeller AS First Securities ASA Fjellpulken AS Fjord 1 Fjord 1 Nordfjord-Ottadalen Billag Fjordkjøkken AS Flora kommune FMC BioPolymer AS Fokus Bank Folk i husan Eiendomsmegling AS Forum Eiendom Fosnavaag Seafood AS Frank Mohn AS Franzefoss Pukk AS Fresenius Kabi Norge AS Kaffehuset Friele AS Fridtjof Kristiansen AS Fru Haugans Hotell AS Fuglefjellet AS Fugro Oceanor AS Fundator AS Fædrelandsvennen AS Gausdal kommune Geelmuyden Kiese AS Geomatikk AS Gilje Tre AS Gilstad Trelast AS Gjesdal kommune Gjøco AS Glava AS Godstrafikk og Bilspedisjon AS Gro Industrier AS Gunnar Hagen AS Gunnar Karlsen AS Gunnar Klo AS Gunvald Johansen Bygg AS Gyldendal ASA Hagen og Godager AS Halliburton AS Hammerfest kommune Handelsbanken Trondheim Handicare Produksjon AS Hansa Borg Bryggerier ASA Hatteland Display AS Haugesund Sparebank Havkrefter AS Hedmark Eiendom AS Heimdal Eiendomsmegling Helgeland Sparebank Helgelandssykehuset HF Helly Hansen Spesialprodukter AS Helse Fonna Hemnes kommune Hemnes Mek. Verksted AS Herlige Stavanger AS Herregalleriet AS Herøy kommune Hi-fi klubben Hitra kommune Hordaland fylkeskommune Hotell Alexandra, Loen AS Hovden Møbel AS HRG Nordic Hunter Douglas Norge AS Hurtigruten ASA Hydro Aluminium AS Hydro Aluminium Profiler AS Hydrotech Gruppen AS Hymax AS Hå kommune Hålogaland Revisjon AS Hårek AS I. P. Huse AS Idecon AS IKEA AS IKM gruppen Ikon AS Industriverktøy AS Ineos Norge AS InMedia AS Island Offshore AS ISS Facility Services AS ISS Norge AS ISS Renhold, Region Vest Istad Kraft AS Itab Industrier AS Itet AS Jemar Norpower AS Jernia AS Jiffy Products International AS Johansen Th & Sønner AS Jotun AS Julius Jakhelln AS Jærentreprenør AS Jørstad AS Jøtul ASA Kappahl AS Karlsen Trelast AS KENO reklame AS Kewa Invest AS Kitron Arendal AS Kiwi Norge AS KL Regnskap Hitra Kluge Advokatfirma Klæbu kommune Klaastad Brudd DA Komplett ASA Kongsberg Automotive ASA Kongssenteret Kontali Analyse AS Kran og Industriservice Nord AS Kristiansund kommune Kruse Smith AS Kvadrat Kvikne’s Hotel Kynningsrud AS Landskapsentreprenørene AS Larsen Atterås & Brosvik AS Lefdal Elektromarked AS, Tiller Leiv Eriksson Nyfotek AS Leiv Sand Transport AS Leksvik kommune Lena Maskin AS Lenvik kommune Lerøy Midnor AS Lerøy Seafood Group ASA Lians Caravan & Fritid AS Lillehammer kommune Lillrent AS Lindesnes kommune Linjebygg Offshore AS Link Signatur AS Livsforsikringsselskapet Nordea Liv Norge AS LKAB Norge AS Lofotprodukt AS Lycro AS Løvenskiold-Fossum M3 Anlegg AS Madla handelslag Madsen Bil AS Magnor Glassverk AS Majas Salong Malo Sagbruk AS Mandal kommune Manpower AS Marien Cybernetics AS Maritech AS Maritime Hotell Flekkefjord Martin M. Bakken AS Meca Norway AS NORGES BANK Melbu Systems AS Melhus kommune Melhus Sparebank Meny Stoa Mercur shoppingsenter Mesta Meyergården Hotell AS Mezina AS Midsund Bruk AS Midt-Troms Kjøleservice AS Minera AS Moelven Østerdalsbruket AS Montér/Optimera AS Mosjøen Kulde og Klimaservice AS Moxy Engineering AS Myklebust AS Møller Bil Haugesund AS Møller Bil Sør Rogaland AS Mørenot AS Nannestad kommune Narud Stokke Wiig AS National Oilwell Vargo AS Naustvoll & Aursand Arkitekter AS Nav Aust-Agder Nav Sør-Trøndelag Nav Telemark Nav Vest-Agder Nerland Granitindustri AS Net trans services AS Neumann bygg AS Nexans Norway AS NHO Trøndelag Nidar AS Nielsen Norge AS NorDan AS Norac AS Nordbohus Vinstra AS Nordea Bank Norge ASA Nordek AS Nordland Betongindustri AS Nordlandssykehuset HF Norengros Johs Olsen AS Norges Handels- og Sjøfartstidende AS NorLense AS Norplasta AS Norpower Brødr. Malo AS Norsik Norske Backer AS Norske Skogindustrier ASA, Skogn Nortrans Touring AS Nortroll AS Nortura BA Notar Eiendom Telemark og Vestfold Novagroup AS Nycomed Pharma AS MONETARY POLICY REPORT 2/2008 Nymo AS Nysted AS Næringsrådet i Arendal kommune Nøsted Kjetting AS Oasen Storsenter Odfjell ASA Ole K. Karlsen Entreprenør AS Oljedirektoratet Oppland Entreprenør AS Optimera Sør AS Opus AS Os kommune Oscar Sylte AS Oshaug Metall AS Oslo Entreprenør AS Otta Sag og Høvleri AS Ottesen & Dreyer AS Owens Corning Fiberglas Norway AS P4 Radio Hele Norge ASA PA Consulting Group AS Pallin AS Pareto Securities AS Parkettpartner Peab AS Pedersens Lastebiltransport AS Personalservice AS Peterson Linerboard AS Petoro Petter Gagama AS PGS ASA Plastal AS Plastsveis AS Pon Power AS Porsgrunds Porselænsfabrik AS PricewaterhouseCoopers DA Proffice AS Profil Lakkering AS Profilhuset Meny-Ultra Profilteam AS Proxll AS PS Data På Håret AS Radisson SAS Caledonien Hotel Rambøll Unico AS Rambøll Norge AS Lillehammer Ramsvik Frisør AS Rana Gruber AS Rana Trevarefabrikk AS Rapp Bomek AS Rasmuss Tallaksen Rasmussen K A AS REC ScanCell AS Reklamehuset Roxrud AS Rema 1000 Norge AS Remvik & Standal Remøy Shipping AS Renates dagspa og hudpleie Renés Barnevogner Retro AS Revisorgruppen Viken AS Rica Hotel Hamar Rica Hotels ASA Rica Maritim Hotel Rieber & Søn ASA Rieber & Søn Elverum Riibe Mynthandel Ring Mekanikk AS Ringsaker kommune Ringside Rørleggerbedrift AS Rio Doce Manganese Norway AS Rissa kommune Rockwool AS Rolfsen AS ROM Eiendom AS Romerike Trelast AS Romsdal Bygg AS Rosenborg Malerforretning AS Ruukki Norge AS Rørlegger D Åsheim AS Rørteknikk og bademiljø AS Saga Boats AS Samarbeidende Revisorer AS SandnesGarn SAS Ground Services SATS Langnes Savalen Drift AS Scan Rope AS Scandic Hotell ScanPartner AS Schenker Linjegods AS Schlumberger Oilfield Services SEB Kort AB, Norge Securinet AS Securitas AS Servi Cylinderservice AS Sg-Finans Brumunddal Siemens Building Technologies Sig.Halvorsen AS Sintef MRB AS Sjøvik AS Sjåtil og Fornæss AS Skagenfondene Skarvik AS Skeidar AS Skien kommune Skipsteknisk AS Sogn Billag AS Solsiden spa og velværesenter AS Solstrand Hotel & Bad AS Sortland Entreprenør AS Spar Kjøp AS Sparebank 1 Nord-Norge, Bodø Sparebank 1 Nord-Norge, Alta Sparebank Sør Sparebanken Hedmark Sparebanken Ørsta Volda Sparebanken Øst 71 Sperre Støperi AS Spice AS Sport 1 Gruppen AS Sportshuset AS St. Olavs Hospital Stabburet AS Stantek Kongsvinger AS Startour Stjernereiser AS Statens Vegvesen Region Sør Stavanger Aftenblad Stavanger kommune Steertec Raufoss AS Steinsvik Materiallager AS Stiftelsen Akvariet i Bergen Stjern AS Stolz Entreprenør AS Studentsamskipnaden i Agder Sunnmørsposten AS Surnadal kommune Sveins Auto AS Swix Sport AS Sykehuset i Vestfold HS Sykehuset Innlandet HF Sykehuset Telemark HF Syljuåsen AS Systemrevisjon AS Søgne og Greipstad sparebank Sørensen Maskin AS Sør-Trøndelag fylkeskommune Teeness ASA Tema Eiendomsselskap AS Time Sparebank Timpex AS Tine Meieriet Øst BA To Rom og Kjøkken Topp Auto AS Torpa Bilruter AS Toten Transport BA Totens Sparebank Toyota Hell Bil AS Toyota Norge AS Trafikk & Anlegg AS Trebetong AS Trehuseksperten AS Trend-Trim Trioving AS Triplex AS Tromsø kommune Trondheimsfjorden interkommunale havn Trysilfjellet BA TV 2 Gruppen AS Tysvær kommune Tønsberg kommune Ulstein Verft AS Umoe Catering AS Umoe IKT AS Unifab AS Valle sparebank Varden AS 72 Vefsn kommune Veidekke ASA Velvære grossisten Ventelo Norge AS Verdal kommune Vesterålen Fiskeripark AS Vesteråls-Revisjon AS Vestre Toten kommune VIA Alta Tours AS VIBO Entreprenør AS Viken regnskap AS Vikeså Glass AS Vikomar AS Ving Norge AS Vinn Vital næringseiendom AS Vizrt AS Vokks Installasjon AS Vågan kommune Våler bygg AS Våler kommune Weatherford Norge AS Wennberg Trykkeri AS Widerøes Flyveselskap ASA Wiersholm Mellbye & Bech advokatfirma AS Windy Boats AS Xerox AS XXL Forus Yara International ASA YIT Building Systems AS Ørland Transport AS Østereng & Benestad AS Øveraasen AS Øyer kommune Ålesund kommune Ålesund Storsenter AS Årdal Stålindustri AS Åsen & Øvrelid AS Aasen Bygg AS NORGES BANK MONETARY POLICY REPORT 2/2008 73 Annex ll Tables, charts and detailed projections 74 Monetary policy meetings in Norges Bank with changes in the key policy rate Key policy rate1) Change 25 June 2008 5.75 +0.25 28 May 2008 5.5 0 23 April 2008 5.5 +0.25 13 March 2008 5.25 0 23 January 2008 5.25 0 12 December 2007 5.25 +0.25 31 October 2007 5 0 26 September 5 +0.25 4.75 +0.25 27 June 2007 4.5 +0.25 30 May 2007 4.25 +0.25 25 April 2007 4 0 15 March 2007 4 +0.25 3.75 +0.25 13 December 2006 3.5 +0.25 1 November 2006 3.25 +0.25 27 September 2006 3 0 16 August 2006 3 +0.25 29 June 2006 2.75 0 31 May 2006 2.75 +0.25 26 April 2006 2.5 0 16 March 2006 2.5 +0.25 25 January 2006 2.25 0 14 December 2005 2.25 0 2 November 2005 2.25 +0.25 21 September 2005 2 0 11 August 2005 2 0 Date 29 October 2008 24 September 2008 13 August 2008 15 August 2007 24 January 2007 1) The key policy rate is the interest rate on banks’ deposit in Norges Bank. This interest rate forms a floor for money market rates. By managing banks’ access to liquidity, the central bank ensures that short-term money market rates are normally slightly higher than the key policy rate. NORGES BANK MONETARY POLICY REPORT 2/2008 75 Charts Chart 1 Norwegian interest rates. 3-month money market rate, key policy rate and 10-year government bond yield. Per cent. 2 January 1995 – 20 June 2008 Chart 2 3-month interest rates in the US, the euro area and Japan. Per cent. 2 January 1995 – 20 June 2008 8 8 9 9 US Euro area Japan 6 6 4 4 2 2 6 6 3 3 0 1995 Key policy rate 10-year government bond yield 3-month money market rate 1997 1999 2001 0 2003 2005 2007 0 1995 0 1997 1999 2001 2003 2005 2007 Source: Norges Bank Source: Thomson Reuters Chart 3 3-month interest rates in the UK, Sweden and among Norway’s main trading partners. Per cent. 2 January 1995 – 20 June 2008 Chart 4 Trade-weighted exchange rate index (TWI) and importweighted exchange rate (I-44)1). 2 January 1995 – 20 June 2008 115 115 12 12 UK I44 TWI 110 110 105 105 100 100 95 95 90 Trading partners Sweden 9 9 6 6 3 3 90 0 1995 0 85 1995 1997 1999 2001 2003 2005 2007 1) Chart 5 Bilateral exchange rates1). 2 January 1995 – 20 June 2008 10 105 9 100 8 95 7 90 6 85 NOKEUR, left 80 NOKUSD, left NOKSEK,right 4 1995 1) 75 1997 1999 76 2001 2003 2005 A rising curve denotes a weaker krone exchange rate. Source: Norges Bank 1999 2007 2001 2003 2005 A rising curve denotes a weaker krone exchange rate. Source: Norges Bank Source: Norges Bank 5 85 1997 2007 Table 1 Main macroeconomic aggregates GDP Mainland GDP Private consumption Public consumption 2003 1.0 1.3 2.8 1.7 -3.6 2004 3.9 4.4 5.6 1.5 2005 2.7 4.6 4.0 2006 2.5 4.8 2007 3.7 Q1 2007 level, billions of NOK Percentage change from previous year/ quarter Mainland Petroleum fixed investinvestment1) ment Trad. export Import 15.9 2.1 1.4 9.3 10.2 4.8 8.8 0.7 12.7 18.8 6.1 8.7 4.7 2.9 7.6 2.9 9.7 8.1 6.2 6.4 3.6 9.4 5.5 9.0 8.7 0.2 0.2 0.3 0.7 -5.9 -1.7 0.2 -2.8 2277 1715 946 449 342 108 427 686 20082) 1) Extraction and pipeline transport. 2) Seasonally adjusted quarterly figures. Source: Statistics Norway Table 2 Consumer prices Twelve-month rise. Per cent CPI CPI-ATE1) CPI-AT2) CPI-AE3) HICP4) 2003 2.5 1.1 2.5 1.0 2.0 2004 0.4 0.3 0.0 0.8 0.6 2005 1.6 1.0 1.2 1.4 1.5 2006 2.3 0.8 2.0 1.0 2.5 2007 0.8 1.4 0.5 1.6 0.7 Jan 3.7 1.9 3.7 1.9 2.9 Feb 3.7 2.2 3.8 2.1 3.1 Mar 3.2 2.1 3.2 2.2 2.8 Apr 3.1 2.4 3.2 2.3 2.7 May 3.1 2.3 3.2 2.3 2.8 2008 1) CPI-ATE: CPI adjusted for tax changes and excluding energy products. 2) CPI-AT: CPI adjusted for tax changes. 3) CPI-AE: CPI excluding energy products. 4) HIPC: Harmonised Index of Consumer Prices. The index is based on international criteria drawn up by Eurostat. Source: Statistics Norway NORGES BANK MONETARY POLICY REPORT 2/2008 77 Table 3 GDP growth in other countries Percentage change from previous year. Projections for 2008-2011 US Euro area Japan UK Sweden China Trading partners1) 2.2 2.6 2.1 3.0 2.8 11.9 3.3 2008 1¼ 1¾ 1½ 1½ 2 10 2¼ 2009 1¼ 1¼ 1½ 1½ 2 9 2 2010-20112) 2¾ 2 1½ 2½ 2½ 9 2½ 2007 Projections 1) Export weights, 26 trading partners. 2) Average annual growth. Sources: Thomson Reuters and Norges Bank Table 4 Consumer prices in other countries Percentage change from previous year. Projections for 2008-2011 US Euro area1) Japan UK Sweden China Trading partners2) 2.9 2.1 0.1 2.3 2.2 4.8 2.3 2008 4 3½ 1 3½ 3¾ 7 3½ 2009 2½ 2¼ ¾ 2¾ 3 4½ 2½ 2010-20113) 2¼ 2 1 2 2 3¾ 2 2007 Projections 1) Weights from Eurostat (each country’s share of total euro area consumption). 2) Import weights, 26 trading partners. 3) Average annual rise. Sources: Thomson Reuters, Eurostat and Norges Bank 78 Table 5 Main economic aggregates In billions of NOK Percentage change from previous year (unless otherwise stated) Projections 2007 2007 2008 2009 2010 2011 0.8 4 3¼ 2½ 2½ 1.4 2½ 2¼ 2½ 2½ 5.6 6 5½ 5 4¾ 2277 3.7 2¾ 2½ 2¼ 2½ 1715 6.2 3¼ 2 2½ 3 3 2½ 1 ¼ 0 Employment, persons 4.0 2¾ ½ -¼ ½ Labour force, LFS 2.5 2¾ 1 ½ ½ LFS unemployment (rate) 2.5 2½ 3 3½ 3¾ Prices and wages CPI CPI-ATE1) Annual wage growth2) Real economy GDP GDP, mainland Norway Output gap, mainland Norway3) Demand Mainland demand4) 1738 6.2 3¼ 1¾ 2 3 - Private consumption 946 6.4 2¾ 2 2¼ 3¼ - Public consumption 449 3.6 3¼ 3½ . . - Fixed investment, mainland Norway 342 9.4 4¾ -1¾ . . 108 5.5 7½ 10 5 0 Traditional export 427 9.6 5 2 . . Import 686 8.7 5¼ 2 . . 87½ 89¼ 90¾ 91½ Petroleum investment5) Interest rate and exchange rate Key policy rate (level)6) Import-weighted exchange rate 4.4 (I-44)7) 90.8 1) CPI-ATE: CPI adjusted for tax changes and excluding energy products. 2) Annual wage growth is based on the Technical Reporting Committee on Income Settlements’ definitions and calculations. The number for 2007 includes costs related to the introduction of mandatory occupational pensions. 3) The output gap measures the percentage deviation between mainland GDP and projected potential mainland GDP. 4) Private and public consumption and mainland gross fixed investment. 5) Extraction and pipeline transport. 6) The key policy rate is the interest rate on banks’ deposit in Norges Bank. 7) Level. The weights are estimated on the basis of imports from 44 countries, which comprises 97% of total imports. . No data available Sources: Statistics Norway, The Technical Reporting Committee on Income Settlements and Norges Bank NORGES BANK MONETARY POLICY REPORT 2/2008 79 Monetary Policy Report. 2 - June 2008 80